News & Publications - 2010 (Visitors) - Members: Click Here
August, 2010
Employee Share Schemes (ESS) – Guide for Employers.
A new web-page has been put up by the Australian Tax Office to assist employers understand the specific rules for the taxation of employee share schemes which apply from 1st July, 2009 in accordance with the new laws that were passed late last year (2009).
The “ESS Guide for Employers” - which was developed in consultation with industry organisations (including the AEOA) - explains how the new laws apply to ESS interests provided at a discount under an employee share scheme.
Where ESS interests have not been granted at a discount, the employee share scheme rules do not apply. However, the benefits given in relation to these interests may be taxed under other provisions of the tax law, such as the capital gains tax regime. (See separate “Guide to Capital Gains Tax” link on the above web-page).
July, 2010
New Research Report Released on Employee Share Schemes Policy and Regulation
The University of Melbourne Law School’s “ESOP Research Project” has released it's final report entitled "Employee Share Schemes: Regulation and Policy". The conclusion of the report is provided below.
All the reports of the “ESOP Research Project” (including this one) can now be viewed at: http://cclsr.law.unimelb.edu.au/index.cfm?objectid=A9840D89-1422-207C-BA2319347B2EE439 .
"Conclusion: Broad-based employee share schemes are found in many Australian companies and the available evidence suggests that they are increasing in popularity. These schemes have long enjoyed bipartisan political support and, in spite of recent reforms, the fundamental features of the regulatory regime in this area are longstanding. Nonetheless, questions of why and how these schemes should be promoted as a matter of public policy continue to feature intermittently in Australian policy debates. Indeed, there have been two federal parliamentary committee inquiries into employee share schemes over the past decade.
This paper has identified and explored several of these key issues, with particular reference to recent tax reforms. These issues include our limited knowledge of relevant company practice; the many available rationales for the promotion of employee share schemes; the nature, and extent, of the tax concessions designed to promote employee share ownership; and the extent to which the existing regulatory regime provides scope for loss of revenue through tax evasion. The discussion of these policy issues indicates how employee share ownership, despite enjoying bipartisan political support, remains highly contested in terms of both the regulatory framework for employee share ownership and the key policy rationales supporting changes to that regulatory framework. Although the government has indicated its desire to encourage employee ownership on the basis that this improves the alignment of employee and employer interests, the recent reforms provide no additional incentives and in fact make access to the concessions more difficult. The problem is the conflict between the desire to encourage employee ownership and the belief that employee ownership schemes are open to abuse."
In a recent AAT decision – AAT Case [2010] AATA 420, Re Willis and FCT reported in 2010 Thomas Reuter’s Weekly Tax Bulletin 26 [1014] options issued to the self managed superannuation fund (SMSF) associated with the Director and Chairman of Mt Gibson Iron Ltd were deemed to have been acquired by the associated individual taxpayer under section 139D ITAA 36. In his article published in the Thomson Reuters Weekly Tax Bulletin, Issue 29, 2 July 2010 at [IIII] “Employee equity arrangements and limited options – get with the times”. Gary Fitton reviews the case and comments on its impact on employee share option arrangements, especially as they affect Australian mining companies.
A further Taxpayer Alert TA 2010/3 was released by the Tax Office on 30 June 2010 in regards to an announcement concerning an arrangement where a company issued options to an employee’s or director’s self SMSF. Specifically, the Tax Office’s concerns were whether:
a) the individual taxpayers had properly accounted for the tax liability arising under Division 13A ITAA 1936 (refer section 139D) – now Division 83A ITAA 1997 (refer Section 83A-305);
b) the share options acquired by the SMSF constitute excess contributions under Division 292 ITAA 1997 at their market value;
c) the dividends derived by the SMSF constitute “non-arm’s length income” for the purposes of section 295-550 ITAA 1997 and therefore subject to a higher rate of tax;
d) the SMSF was utilising the correct cost base in calculating any CGT liability upon disposal of the company shares; and
e) the SMSF trustee had breached section 66 of the Superannuation Industry (Supervision) Act 1993, which prohibits the trustee from intentionally acquiring assets from a related party of the fund.
I am of the view that these negative taxation issues may not have arisen had the company established a dedicated employee share trust to allocate shares and rights to its employees and directors.
Gary Fitton
Management Committee Member, AEOA.
June, 2010
Keeping Jobs and Capital Local - The Ohio Employee Ownership Centre in Australia
Representatives from the Ohio Employee Ownership Centre in the USA will be visiting Australia in June at the invitation of the Australian Employee Buyout Centre. The Ohio Employee Ownership Centre (OEOC) is the most successful employee buyout centre in the world. Based at Kent State University it was established in the economic downturn of 1984 when the university, trade unions and the Catholic Church endeavoured to save a steel mill from closure. That experience lead to the formation of the OEOC which went on to establish 89 buyouts over the next twenty five years. Some 15% of these buyouts are from companies that were threatened with closure. The OEOC was established by the late Professor John Logue who played a key role in advising AEOA co-founder Anthony Jensen in planning for the establishment of the Australian Employee Buyout Centre (AEBC).
The AEBC in association with the AEOA will be having a luncheon on Friday, 18th June for our guests from the OEOC - Bill McIntyre and Jim Anderson, who will be presenting at the luncheon on the topic "Keeping Jobs and Capital Local - the Ohio Employee Ownership Experience". Please see the Luncheon Invitation for more details.
For an interview on ABC's "Lateline" program with the OEOC, see "Organisations could source funds from within" .
For more information on employee buyouts, see the "Employee Buyouts" Discussion Forum.
Official Launch of the Australian Employee Buyout Centre (AEBC)
The official launch of the Australian Employee Buyout Centre (AEBC) will take place on Monday, 7th June, 2010 at Fairfield Council Chambers, 86 Avoca Road, Wakeley. The AEBC will be launched by The Hon Chris Bowen MP, the Federal Member for Prospect and Minister for Human Services and Minister for Financial Services, Superannuation and Corporate Law, under the banner "an inovative way to save companies and jobs". For more on the launch and details on whom to contact, please see the "Invitation".
May, 2010
Release of Board of Tax Review and Government Response on Technical Aspects of Employee Share Schemes Reforms.
The Assistant Treasurer, Senator Nick Sherry, has released the Board of Taxation's review into elements of the taxation of employee share scheme arrangements.
The Assistant Treasurer asked the Board of Tax to examine how best to determine the market value of employee share scheme benefits, and whether shares and rights under an employee share scheme that are provided by start-up, research and development and speculative-type companies should be subject to a tax deferral arrangement, despite not being subject to a real risk of forfeiture.
The Board's review makes five recommendations and includes a report by the Australian Government Actuary into the valuation of unlisted rights.
However, the Government has ruled out changes to its employee share scheme laws to assist start ups and small businesses, despite a Board of Taxation review finding shares and options are a crucial way for small firms to attract and retain talent.
You can access a copy of the report and see the Minister's press release at "Release of Board of Taxation Review".
Share and share alike
If employee share schemes are complicated, why are they becoming more popular? Leon Gettler in the March, 2010 edition of HR Monthly (from the Australian Human Resources Institute - www.ahri.com.au) reports on this in an article called "Share and Share Alike" on why human resources practitioners are increasingly finding that employee share schemes are very useful for “showing employees the company values them”, “sharing financial success with employees” and “aligning employee interests with shareholder interests”.
The article quotes the leader of the University of Melbourne Law School's "ESOP Research Project", Professor Ian Ramsay who says: “We started off wondering how important the tax concessions were and I am not suggesting they are unimportant but in terms of what motivates the company, it seems to be more about HR rather than tax issues that drive companies to offer employee share schemes.” The research showed that these schemes were more often found in companies that had a centralised human resources capability, along with growth over the previous 12 months.
Despite the growth of employee share schemes in Australia, it is still a relatively undeveloped market, especially when compared to the United States. According to a US General Social Survey in 2006, 17.5 per cent of the private sector workforce in the US held shares in their company and 9.3 per cent held options. And in contrast to Australia, the vast majority of US employee share schemes were found in unlisted companies. Similarly in Europe, a survey of EU member states found that just under one third (31 per cent) of organisations with more than 200 employees had a share ownership scheme.
UK Election Increases Interest in Employee Ownership
With a "Coalition Government" betwen the Conservatives and the Liberal Democrats resulting from the UK elections, it will be interesting to follow whether the big promises on expanding employee ownership will be delivered.
The Conservative manifesto focused on the role of employee-led co-operatives and mutuals as a way of transferring public assets and revenue streams to public sector workers. The Party promised to “encourage” public sector employees to come together to bid to take over the services they run. Achieving commercial freedoms and financial incentives whilst balancing the interests of users and tax-payers will require much careful thought and planning.
The Liberal Democrat manifesto also focused on the role that employee trusts, co-operatives and mutuals could play in the public sector. The Party promised to sell off 49 per cent of Royal Mail and divide the other 51 per cent between an employee trust and government. In the National Health Service, the Liberal Democrats will allow front-line staff to establish employee trusts, giving them real involvement and a say over how their service is run.
The Labour manifesto promised a “step change” in the role of employee-owned companies in the economy, recognising that many business owners would like to see their companies in the hands of their employees when they retire. Labour would have reviewed the outstanding barriers to the formation of more employee-owned companies, and cited the John Lewis Partnership as a model.
For more on the role that employee ownership plays in the "Big Society" agenda now being adopted in the UK, see the "Building Big Society" statement. See also the key report on this matter from the Employee Ownership Association UK called "Innovation Included: Why Co-owned Businesses are Good for Public Services".
See also the report "New Models of Public Service Ownership", Office of Public Management, UK, July, 2010 which outlines the case for employee owned cooperatives operating public services.
UK Employee Ownership Association's Election Manifesto: 'Ownership Matters'
The UK Employee Ownership Association’s submission to the political Parties ahead of the May, 2010 General Election, ‘Ownership Matters’ explains the case for wider employee ownership and shows how Government can help encourage continued growth of this £25 billion sector of the UK economy.
See the report "Ownership Matters"
April, 2010
Trade Unions and Employee Ownership
On 14th April, 2010 a roundtable conference and seminar on employee ownership was held at Trades Hall in Sydney at the initiation of Unions NSW that was addressed by AEOA President, Ian Woods and Australian Employee Buyout Centre (AEBC) Project Manager, Anthony Jensen. The main topic was the role that employee buyouts may play in tackling job shedding and turning around companies where jobs are under threat, as well as what benefits employee ownership can provide in terms of employee participation and union tactics to improve workplaces and job satisfaction. The day was successfull in that it introduced several unions to a topic that they had not been considered previously as a priority for their attention in the current economic climate of company rationalisations and closures.
For more information, see the presentation by Anthony Jensen entitled "Unions and Employee Buyouts"
See the AEBC brochure that was distributed at the meeting "Securing the Future: Saving Jobs"
Health Reform and Employee Ownership: Why this is a key debate in the in the forthcoming UK Elections.
All three major political parties in the United Kingdom have endorsed the idea of converting the National Health Service (NHS), and possibly other social services the government provides, into employee and stakeholder-owned businesses along the lines of the John Lewis Partnership - an employee-owned chain of department stores, supermarkets, a travel and ticketing service, and a small manufacturing company which employs 67,000 people, all of whom own shares through a trust.
At John Lewis, employees elect a partnership council that can discuss anything and decides on non-business related issues. Employees also elect five representatives to the 12-person board of directors. In addition to ownership, there is a substantial annual bonus, a pension plan, and other benefits. The company has been widely praised by politicians, customers, and the media for exceptional customer service and business efficiency, leading to its current highly publicized role as a potential model for social services
That model is already being put into effect privately. The first in a chain of John Lewis-style private hospitals and clinics has recently been launched. Circle Health has plans to expand to 30 hospitals and 10,000 employees. Led by prominent London financier, Ali Parsa, Circle Health will be 49% owned by an employee trust. Parsa told The Guardian newspaper: "Employee ownership works. It was the model we used as partners at Goldman Sachs. Most law firms operate as partnerships, GPs are partnerships. Healthcare is a professional anomaly in not being a partnership. There's no reason why we can't run NHS hospitals and give control back to our staff."
For a useful UK research report on this topic, see "NHS Mutual". This report is a study into the scope for engaging and motivating health service staff using employee ownership and other social ownership models. The report, on which the UK Employee Ownership Association advised, concludes that employee ownership of the kind already pioneered by Central Surrey Health has a valuable role to play in the NHS but needs support from policy makers. The report can be viewed at: http://www.employeeownership.co.uk/publications.asp .
March, 2010
Launch of Social Business Australia
Social Business Australia (SBA) is a new organisation formed to help develop and grow social businesses in Australia. SBA exists to support and assist those commercial businesses which have social objectives at their core and diverse ownership structures. SBA was launched at Parliament House, Canberra on Monday, 15th March, 2010 with an Inaugural Lecture presented by Dame Pauline Green, President of the International Cooperative Alliance (www.ica.coop). Dame Pauline presented the 'SBA Inaugural Lecture" on the topic "Investing in Alternative Economic Futures".
The founders of SBA are a group of like-minded social businesses in Australia. The group includes representatives of the mutual and co-operatives sector, employee ownerships, collaborative enterprise development and social marketing, media and communications. The founding sponsor of SBA is Capricorn Society Ltd, based in Perth, WA. The AEOA supports this initiative and several members of the Management Committee attended the Launch.
You can see more on this this new initiative at www.socialbusiness.coop.
My Business: Selling shares to your employees
International research suggests that employee owned businesses grow faster and are more profitable than conventional firms. In the February, 2010 edition of My Business magazine (www.mybusiness.com.au), Stuart Frost, the co-founder of CAD Partners (http://www.cadpartners.biz/ ), recounts his experiences in structuring an employee share scheme in his business.
It provides valuable insights to other business owners looking to exit their business through a sell down to their staff.
As one of CAD Partners employees - Daniel Cadart - says: “Apart from dividends and capital growth, this creates a great sense of belonging to something. Whether it’s family, a tribe, a group or community – society is evolving and finding new ways to work together. It makes me feel part of this community. It provides motivation to invest yourself in the business.”
There are advisors who offer help to set up a share plan (see ESOP Consultants). Frost suggests ensuring you get a fixed price for setting up the unit trust and for the unit trust plan administration.
With thanks to My Business magazine (www.mybusiness.com.au) and the author, Stuart Frost for permission to publish this article.
See the full article Sellling Shares to Your Employees.
February, 2010
Bam Creative Completes EBO.
Late last year, Miles Burke, the founder of Perth-based Bam Creative, engineered an employee buyout within his own business. He invited all the company’s employees to become shareholders. Bam started the new year with everyone buzzing around the office, genuinely working for the collective good rather than selfish individual ends. Here’s Burke’s account of how (and why) it happened - "How to supercharge employees: Just ask them to buy the company, like Bam Creative did" (at: http://anthillonline.com/how-to-supercharge-employees-just-ask-them-to-buy-the-company-like-bam-creative-did/ ).
Here is some advice from the article:
Why buy from within?
My reason was simple: I believe a business owned by its employees is more powerful than a business owned by only one or two shareholders. The benefits of an employee owned business include:
• Adds wealth and value for all shareholders.
• Creates a deeper level of employee commitment to the business.
• Encourages greater innovation at all levels.
• Creates a common purpose across the entire organisation.
• Aligns employees’ goals with those of the business.
• Encourages better customer service.
Advice for business owners
• Employee ownership should be a consideration in any exit strategy.
• Face your fear of transparency — trust your team.
• Look long-term, not short-term. Sure, there’ll be a steep learning curve, but it won’t last forever!
• Empower everyone in decision-making — even when shareholdings are different from one another.
• Once you do it, tell the world about it. It’ll excite customers, suppliers and, most of all, your new shareholders.
• Focus on the business, not individual roles. Keep shareholding and organisation structure separate.
Most importantly, do your research and consider all the outcomes. Employee ownership could backfire without the right mix of people, or the right strategy to deal with morale and disputes.
January, 2010
Seminars on Employee Share Schemes
During February, the Australian Taxation Office (ATO) is offering free seminars (duration: 2 hours) to employers on the legislative changes for reforms to income tests and employee share schemes.
Seminar topics:
Reforms to income tests:
What are reportable employer super contributions and personal deductible contributions?
How do the new income tests apply to salary sacrificing into super?
What contributions are not reportable employer super contributions?
Employee share schemes:
What are the upfront and deferred scheme rules?
What happens to schemes in place prior to 1 July 2009?
What do you and your employees need to know about these changes?
What are the reporting requirements?
Registration is available at:
http://www.ato.gov.au/businesses/content.asp?doc=/content/00202811.htm
For what the seminars will cover, see the "ATO ESS Seminar Slides"
For the results of the seminars as compiled into an information guide, see the ATO's "ESS Guide for Employers"
Options in a Time Warp
In a late amendment to the employee share plan taxation provision of Division 83A ITAA97, which has retroactive application from 1 July 2009, the Government introduced the provisions of section 83A-340 ITAA 97 which apply to “indeterminate” rights exercised into shares to backdate the time of acquisition of a right to a share by an employee to be subject to the taxation provisions of either:
(a) Division 13A, where the original right was acquired prior to 1 July 2009: or
(b) Division 83A, where the original right was acquired from 1 July 2009.
While this may have some elements of retrospectivity in terms of the deemed timing of the taxable acquisition of the right to the share, the provisions actually assist companies providing so-called “indeterminate” rights to shares in providing more clarity and certainty to the taxation treatment of these rights for their employees.
An example of an “indeterminate” right is where an employee acquires a right to shares or cash at the behest of the employer. This situation is quite common for companies not listed on a stock exchange who may wish to provide an internal market for shares and rights for their employees prior to listing on a recognised stock exchange.
See the full article on this topic - "Options in a Time Warp" - by Gary Fitton that was published in Thomson Weekly Tax Bulletin, 8th January, 2010.
From Colleagues to Owners
‘From Colleagues to Owners’ is an Employee Ownership Association UK paper on how and why companies make the transition to employee ownership. Based on ten case studies, the report explains what motivated a highly diverse mix of businesses to consider employee ownership as an employee buyout, a business succession or a start up. Sponsored by co-owned Child Base, whose chief executive writes the report’s foreword, ‘From Colleagues to Owners’ received a Parliamentary launch sponsored by co-ownership advisers the Baxi Partnership. Author: Andrew Bibby. Published: April 2009. you can access the full report at: http://www.employeeownership.co.uk/publications.asp .
GO TO "2009 News" HERE
|
