CEOs keep cosy tax deal
By Stuart Washington | smh.com.au | 02 May
Chief executives will still be able to enjoy effective income tax rates as low as 4 per cent on their share option payouts after this year's federal budget closes an option plan loophole.
The Federal Treasurer, Wayne Swan, trumpeted yesterday that closing the loophole would remove $77 million from senior executives' pockets over four years.
"The message to those who have been avoiding tax in this way is, 'The game's up, we're shutting this loophole down, and you'll now have to pay your fair share,"' Mr Swan said.
But shareholder activists criticised the move for not addressing fully a generous tax concession enjoyed by the wealthiest executives on their options plans.
The Federal Government move is aimed at addressing a fringe issue related to the ability to pay income tax on options up front. But it does not stop the practice and the substantial tax benefits it can provide.
"The fundamental issue is why should there be a tax concession at all?" said Dean Paatsch, a governance analyst, who has examined the issue for many years.
The Herald has previously revealed that a little-known section of the 1936 Income Tax Assessment Act lets chief executives pay income tax up front on their grants of share options included in salary packages.
If Allan Moss, the chief executive of Macquarie Group, used this system for options that were reported as exercised in last year's annual report the effective income tax paid on the gain from his options would have been less than 4 per cent.
There is a catch. After paying income tax up front, the executive becomes liable to pay capital gains tax on any gain he or she makes when the shares are eventually sold.
However, the discounted capital gains tax regime allows these gains to be taxed at half the rate of an executive's top income tax rate.
In the example of Mr Moss, this treatment would result in a total tax rate of 25 per cent on his option gains.
That would be less than the 30 per cent tax rate on overtime paid by a bus driver on a salary of about $50,000.
Mr Swan's projection of $77 million in extra tax raised from senior executives relates to a fudging of the up-front payment, where senior executives pay "up-front" income tax obligations only after their shares have appreciated in price.
While the Federal Government says tax legislation needs change, current legislation says the up-front income tax must be paid in the year the options are granted.
Mr Paatsch said the existing system was of significant benefit to chief executives, given income tax paid up front could be claimed back if options failed to perform. "Let's not be wilfully blind ," he said. "It's a one-way bet."
However, big tax benefits from paying income tax up front on options plans also depend on healthy increases in share prices during a bull market. This year's poor performance on the sharemarket is likely to substantially dampen any up-front tax payment benefits.
First published by Smh.com.au on May 02 2008
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