What needs to change in Australia's approach to employee share plans to bring us up to speed with the rest of the developed world?
Australia ranked only 13th out of 33 countries in the latest Global Equity Organization (GEO) research report comparing the effectiveness of employee share plans across different global markets. Last year, Australia was 16th out of 27 countries. The report compares answers to 28 questions, covering taxation, employment laws, securities laws, economics and political considerations and cultural considerations.
“The major metric in there is taxation, and we are a poor performer,” says Leigh Thomson, Director of Client Relations, Employee Share Plans, APAC, at Computershare. “The Australian Government has an opportunity to make some real changes in this space.”
Jo Garland, General Manager, Executive Remuneration at Wesfarmers says: “For us to streamline the process, it's about simplification and the removal of some of the administrative barriers to offering share plans within Australia.”
In this article, our panel of experts discuss some bold ideas for the future of employee share plans in Australia.
Paula Lancaster
Director, Employee Equity & Incentives, Deloitte
Shaun Cartoon
Partner of tax practice, Arnold Bloch Leibler
Jo Garland
General Manager, Executive Remuneration, Wesfarmers
Leigh Thomson
Director of Client Relations, Employee Share Plans, APAC, Computershare
Why are Australians less engaged with employee share plans?
Despite the potential financial benefits, many Australians hesitate to engage with employee share plans. Understanding the root causes of this hesitation is key to improving engagement and designing plans that resonate with a broader workforce.
Paula Lancaster, Director, Employee Equity & Incentives at Deloitte, who has recently returned to Australia after nearly a decade in the UK, suggests two potential reasons behind lower engagement in share plans among Australian employees:
- A cultural perception in Australia that employee share plans are primarily designed for executives and senior management, rather than for the broader workforce.
- The view that employee share plans are financially complex and therefore “a bit scary”.
In many cases, Australian issuers have had to personally follow up with employees – often by phone – to encourage participation in valuable equity plans, including generous share-matching schemes worth thousands of dollars.
“I would love to see more people demanding them when they start at an organisation,” Lancaster says, adding that employee share plans in Australia are a powerful tool for creating culture and cohesion among executives and employees.
Should Australia introduce share awards into the tax withholding system?
Our panel discusses how Australia’s share plans can stay competitive and engaging.
Lancaster's view is that this fear-based avoidance is “probably stemming from the fact that we don't apply income tax withholding on share awards even though they are employment income”.
In most jurisdictions around the globe, income tax withholding on employee share plans is standard practice, helping to create a much smoother experience for employees by simplifying the tax process.
Shaun Cartoon, Partner of tax practice at Arnold Bloch Leibler, one of the firms involved in the GEO report, also recommends that employee share schemes be moved into the PAYG framework.
“At the moment, it's the only type of employee benefit that requires employees to self-assess,” he explains. “On the law side, I have seen this cause quite a few problems for employees who come unstuck because they forget to sell enough shares to cover their tax liability – and that can end in disaster.”
Implementing this type of change, however, requires careful administration planning and may be better accepted if it was optional for companies. Issuer Jo Garland has raised concerns about the potential for this shift to create added administrative burden for HR departments.
What other changes are worth considering in Australia?
Australia's $1000 tax free threshold available to employees participating in share plans has not been indexed since its introduction in 1997, and is now widely regarded as outdated. Similarly, the $5000 tax-deferred scheme has remained unchanged since 2009.
“I think lifting the $1000 tax exemption to something more meaningful, like say $5000 a year, would be a great, great initiative,” Cartoon suggests. This would bring it into line with the level of incentives that are offered in countries around the world.
Lancaster suggests Australia look to the rest of the world for ideas to be “slightly more creative” than the current tax advantage plans.
Australia could consider global examples such as:
- U.S. 423b plan, where the contribution limits are USD25,000 per year
- New Zealand's exempt scheme has a contribution limit of NZD7,500 per year
- UK's SIP plan where employers can offer free shares up to GBP 3,600 per year
Another reform suggestion gaining wide support is to allow individuals to choose between paying taxes upfront or deferring them. This would give people more control over their employee share plan tax implications.
Cartoon explains: “If employees could elect to be taxed upfront on grant of their employee share scheme interests, could take their employment tax hit on grants, then have further gains taxed under the CGT (capital gains tax) regime and with the potential of the 50% discount applying.”
There are also calls to remove the $180,000 adjusted taxable income threshold, which currently limits access to certain tax advantages.
How is technology vital to increasing share plan participation?
Cartoon says that even if no changes to the law actually occur, the biggest boost to the industry will come from “game-changing” technological innovation.
“When we have companies like Computershare that have driven forward the technological innovations of moving towards an app-based technology for employees, the technology is there to be embraced, and we want companies to offer it to their employees,” he says.
“Having full visibility and control over your share plans as an employee – that's like a ‘colour TV' moment for our industry. Once you have that on an app, suddenly that brings share schemes to life.”
