A revamped and two-year only employee share scheme (ESS) proposal could be a valuable mechanism to align the interests of employers and workers, as Australia attempts to emerge from the COVID-19 recession, a KPMG paper released today argues.
KPMG’s COVID Accelerated Recovery Employee Shares (CARES) plan avoids some of the limitations of the current ESS regime. It would allow employees to acquire a higher value of tax-free shares, and employers to get a higher tax deduction for issuing the shares than is currently available under existing tax rules
Grant Wardell-Johnson, Lead Tax Partner, KPMG Economics & Tax Centre, said: “The last few months have seen companies and workers pulling together, which Australia needs to build on, post-crisis. A good example is the way government, employer groups and unions have worked together on temporary changes to workplace legislation to facilitate the JobKeeper program. It is now timely to take a fresh look at the tax and regulatory settings for employee share schemes, to see what this role they might play in the recovery.”
“International evidence shows employee share schemes can be an effective way of boosting both job satisfaction and performance improvement, but our current rules are quite restrictive. We believe our proposal would be more tax-effective for employees than a cash bonus, while, crucially, allowing hard-hit employers to incentivise workers while preserving more cash.”
The CARES plan works by allowing a maximum of $3000 in shares to be granted, tax-free, by the employer to the employee, and a 50 percent capital gains tax discount to be given on sale of the shares.
The paper shows how an employee earning $80,000 who receives CARES worth $3,000, would come out better off compared to an employee who uses after-tax income to acquire shares in the employer:
|Value of shares acquired (after paying income tax and Medicare levy at 34.5 percent)||$3,000||$1,965|
|Value at sale (assume 50 percent capital growth)||$4,500||$2,948|
|Tax on capital gain (including CGT discount)||-$518||-$170|
|Net value received||$3,982||$2,778|
Shares acquired would be subject to a sale restriction for a maximum of three years. Additionally, employees could be given a window to sell a portion of their CARES once the share price has grown by 50 percent, if this occurs earlier.
An employer would offer CARES on an opt-in basis, and it would represent an additional pathway for providing remuneration to workers in a situation where capital was scarce
CARES should be capable of fitting within the streamlined legal requirements that the Australian Securities & Investments Commission (ASIC) has issued in relation to employee incentive schemes for listed and unlisted companies.
Grant Wardell-Johnson said: “The recent Parliamentary Select Committee on Financial Technology recognised the potential value of ESS to Australia’s start-up sector but identified that current CGT implications reduced their effectiveness to employers as a means of attracting and retaining talented staff.
“Our thinking is that CARES would initially be available for a limited number of financial years to act as an additional boost to workforce incentivisation as we seek to rebuild the economy. If at the end of that period it was seen as having been highly successful and cost-effective, it could then be extended. There would be a cost implication to government, but we believe a time-limited scheme could give valuable and targeted impetus to national recovery efforts.”
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