Smart Remuneration: Bridging the Gap between Boss and Worker: Now Is the Time for Employers to Consider Employee Incentive Programs Which Are Both Tax Effective and Help Boost Worker Productivity and Motivation

By Rigney, Harry | Journal of Banking and Financial Services, August-September 2003 | Go to article overview

Smart Remuneration: Bridging the Gap between Boss and Worker: Now Is the Time for Employers to Consider Employee Incentive Programs Which Are Both Tax Effective and Help Boost Worker Productivity and Motivation


Rigney, Harry, Journal of Banking and Financial Services


July may have bought respite from the business pressures leading up to financial year end, but by August most companies should be considering how to improve performance this year. Smart remuneration should be considered in this context.

Smart remuneration is about many things. These include sharing the business rewards between employer and employees, linking and bonding employees through values such as shareholder focus; and building productivity through key performance indicators such as profit, safety and client service.

Smart remuneration is pivotal to attracting and retaining key employees and aligning the interests of boss and worker.

But as with all multi-dimensional tools, it is critical to match the remuneration program to the need. My following comments may help to achieve this aim.

Old concept, new rules

Robert Menzies spoke of the potential for full employment being obtained through profit sharing in his election campaign in 1949. But despite half a century or so of government support for the concept, a wide gap has evolved between "big end of town" executive option packages and shop-floor participation in employee share ownership plans. There is still very low takeup of the latter.

Smart remuneration, or incentive, programs sit above fixed remuneration and rewards. As with most aspects of remuneration, understanding the taxman's role is the key to appreciating why successful programs achieve the right outcomes.

Incentive programs may be classified as having features which are tax-advantaged, tax-neutral and tax-sensitive. In simple terms, tax-advantaged attributes are featured in plans which fall within one or other of the two concessions established by Division 13A of the Income Tax Assessment Act 1936.

Tax-neutral features are those aspects which really have nothing to do with tax, but are covered by the usual tax laws in relation to associated income and expenses. Tax-sensitive features are those identified by the taxman as involving inappropriate interpretation of tax laws and potential tax avoidance.

Division 13A allows for two classes of tax-advantaged employee incentive schemes. Tax-exempt plans are appropriate for providing annual benefits, by way of share or option entitlements issued at a discount, in the manner of a bonus. Tax-deferred plans are more appropriate for participation in the capital growth of an enterprise.

A tax-exempt employee share ownership plan (ESOP) under Division 13A provides an annual tax shelter of up to $1000, subject to the conditions that shares or rights cannot be forfeited, nor can they be disposed of within three years of issue or upon termination of employment.

Such a plan must be made widely available in a given business context, to at least 75 per cent of the Australian employees with at least three years service with the employer. No participating employee may hold more than 5 per cent of the voting shares in the employer entity.

A tax-deferred ESOP is another option available through the provisions of Division 13A. No assessable income is derived upon entry into an appropriately structured plan of this nature, but assessment is deferred provided that qualifying shares or rights are acquired under the plan.

Assessment of the discounted amount is deferred until the earlier of: disposal of the shares or rights (except by exercising the rights or options); when any restrictions or conditions cease; on termination of the employee; or after ten years have passed.

When shares are provided at a discount, the assessable amount is simply the market value of each share at the time of issue, less any employee contribution. When options or rights are granted at a discount, the assessable amount is worked out according to prescribed tables.

These tables, contained in Division 13A, are based on: the amount--if any--paid to acquire the options; the ratio of market value of the shares on exercise to the amount paid to acquire the rights or options; and the period until the last day for exercise of the rights. …

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