Board of Taxation wants more changes to share schemes

The Board of Taxation is expected to recommend the Government amend the tax valuation system for share schemes in smaller businesses, after a massive outcry prompted assistant treasurer Nick Sherry last year to request the board review the plans.

The move comes nearly one year after the Government announced the changes, which caused a number of SMEs to abandon its share schemes.

Board chairman Richard Warburton has told the Australian Financial Review the board’s report will focus on valuing shares for smaller companies, so they can continue to use schemes as an incentive for new employees.

“We’ve put in some pretty strong recommendations around valuing shares and options which I think will be accepted,” Warburton said.

“Initially there used to be just a single method for valuing options, the Black-Scholes method for any form or options or rights… the more we look at it, the more we realise that you can’t have just a one-size-fits all. You are going to have to have different valuation methods for listed right, unlisted rights and options and that will probably be the biggest change we will be looking at, having separate valuation methods.”

The comments come after a number of organisations, including the Association of Mining and Exploration Companies, the Australian Private Equity and Venture Capital Association and the Australian Institute of Company Directors all sent submissions to the Board for review.

The controversy began during the May budget last year, when the Government announced changes which would see workers earning more than $60,000 be taxed upfront for employer-provided shares and options. The usual tax emption for $1,000 worth of shares would not apply.

The Government hoped to address rorting within employee-share schemes, but the SME community cried out in protest. Many smaller firms do not have larger payrolls for new staff, so they offer a stake in the company as an incentive and form of remuneration, with the hope that as the company increases in size the value of the stock would also increase.

The Government made further changes as a result, including raising the income threshold to $150,000, but the protests were so strong the assistant treasurer Nick Sherry requested the Board of Taxation review the changes entirely.

Institute of Chartered Accountants tax counsel Yasser El-Ansary says the problem with the changes was that employee shares are structured for a particular benefit, that is, remuneration, and should not necessarily be taxed the same as other shares.

“A lot of smaller companies use these shares for different purposes than other companies might. You’re an SME, struggling with cashflow, you don’t have a whole heap of payroll lying around, so you give out shares. This is remuneration, it’s not necessarily a bonus payment.”

El-Ansary says the Board appears to be recommending a new system for taxing listed and unlisted options, and evaluating options and rights.

“We’re hoping for some changes to be recommended, and we’re pleased that’s what Warburton appears to be saying. We do support an introduction of new rules for smaller companies, and there is a compelling case for acknowledgement within tax law of share schemes used as remuneration.”

“None of us know the detail, but conceptually the board appears to be heading in the right direction. We’ll wait to see the final contents of the report to see the details.”

The Board of Taxation declined to comment.