Employee Share Ownership in Australia – theory, policy and practice Ann O’Connell May 2012

1. Employee Share Ownership in Australia – theory, policy and practice Ann O’Connell May 2012 1

2. Employee Share Ownership: Current Practice and Regulatory Reform ARC funded Project 2007-2010 Carried out: Review of literature Empirical surveys SME Workshop Comparative conference Produced 11 reports 8 journal articles Book pending

3. Findings • Lack of data continues to be a problem • Lack of clear rationale • ESO enjoys bipartisan support but politically contested • Corporate and tax law have different policy drivers • Practice is extremely responsive to regulatory environment • Comparative analysis suggests Australia provides less support than eg US and UK • Impact of globalisation 3

4. 1. Lack of data • Very little information about incidence ie breadth or depth of ESO (cf other jurisdictions) or current practice • Little evidence about why implemented or taken up in Australia • No clear identification about why should be encouraged • Impact of new reporting requirements? 4

5. 2. Rationales Rationales identified in the literature Why do employers implement ESOPs? Listed entities Unlisted entities Why do employees participate in ESOPs? Why do governments support ESOPs?

6. 3. Bipartisan support but…. • History of government support for broad-based employee share ownership • But politically contested – why? • Seen as vehicle for tax avoidance • Seen as tax break for rich employees • Confusion about different forms: • Broad-based cf selective schemes • Shares cf ‘rights’ • Contributory cf non-contributory schemes • Reward for past service or incentive? 6

7. 4. Mixed policy drivers • Corporate law assumes an investment decision – even if no contribution • Prospectus required • Exemption only for listed entities • OIS requires audited financial statement • Tax law assumes shares/rights are a form of non-cash remuneration • Number of requirements inhibit unlisted entities • Not taxed as fringe benefits • Gains on revenue account, often even on disposal • May be taxed before disposal eg when employment ends 7

8. 5. Regulation drives practice • Corporate law requirements means ESOPs less common for unlisted entities ie requirements favour listed entities • Tax law results in particular form of plans: • $1000 plans • Use of trusts • Option plans • 5% limits 8

9. 6. Comparative analysis • US has long history of ESO; UK more recent legislative encouragement • Australia purports to encourage but number of issues: • Timing • Valuation issues • Concessions – quantum and conditions • No small business concessions • Tax on disposal: capital or revenue? • Corporate law requirements 9

10. 7. Globalisation • Multinational employers more conscious of what is occurring elsewhere • Position of cross-border employees – Div 83A provides non-Australian source to the extent that it relates to employment outside Australia 10

11. Conclusions Government claims ESOPs should be encouraged Corporate law: provide for specific disclosure for ESOPs coordinate buy back with tax law requirements Tax law: Differentiate between broad based and selective schemes Improve incentives Relax requirements for incentives Allow for capital gains tax treatment on disposal