SA Mines and Energy Journal : June-July 2010
JUNE/JULY 2010 SA MINES & ENERGY JOURNAL 34 FINANCE Awell designed executive share and option plan should align the interests of the executive with the interests of the shareholders. While tax is an important factor in designing the plan, it should not drive the design. Of course, the executive will generally prefer not to pay tax until they can deal with the shares or options. In the December/January edition of the SA Mines and Energy journal, we considered the new rules for employee share and option plans. We discussed the issue of when an executive receives options (which have no conditions), pays tax in the year the options are granted, the options never "come into the money" , but the executive cannot receive a refund of the tax paid and instead receives a capital loss. The Board of Tax was asked to consider this issue for start-up, R&D and speculative- type companies (eg junior miners) that attract talented people by issuing unconditional options rather than cash salary. Unfortunately, it recommended not to have special tax deferral rules for these types of companies. So where does that leave us? Since July 1, 2009, the only way tax can be deferred is either: • Under a salary sacrifice plan (however, as only a maximum of $5000 of shares or rights can be sacrificed, this may be of little benefit). • When the options are subject to a 'real risk of forfeiture' (eg a minimum employment term or performance hurdles). In addition, companies are increasingly drafting plans with further disposal restrictions so the executive is not caught paying tax on options while they are "out of the money" . If unconditional options are issued they will be taxed up front, but the new rules allow the taxable value to be equal to market value. The market value of the options at the time of grant may be very low. Next steps: • Review your current share and option plans. • Are the plans still achieving their desired objective for the company and the executive? • What is the taxing point for shares and options granted under the plan? • Are your executives aware of the tax changes and when they will pay tax on the shares and options they have been granted? • This year, employers will be required to report to the executive and the Australian Tax Office (ATO) all shares and options they received during the June 30, 2010 year and shares and options issued prior to July 1, 2009, which may have a taxing point in the 2010 year. Are you able to capture this information, particularly in relation to pre-July 1, 2009 grants? • You can expect the ATO will be reviewing the Remuneration Report in annual reports and comparing it to the details yreported to them. There may be differences in this information, so you may wish to assist your executives in reconciling the information in the event they receive a query from the ATO. Government response to the Productivity Commission's report on executive remuneration. The Government has accepted the majority of the Productivity Commission's recommendations, particularly in relation to: • the composition of remuneration committees, • the use of remuneration advisers, • the information contained in the Remuneration Report, and • where a Remuneration Report receives a ''no'' vote of at least 25 per cent , the Board must report back to shareholders in their next Remuneration Report how the shareholder's concerns were addressed. If the subsequent Remuneration Report also receives a ''no'' voteofatleast25percent,a resolution is put that all elected directors stand for re-election at an extraordinary general meeting (EGM). If this resolution is carried by more than 50 per cent of eligible votes cast, an EGM is required to be held within 90 days. Interestingly, the Government also added its own recommendation to clawback executive bonuses which were based upon financial accounts that are subsequently found to be materially misstated. The Government said it will be consulting with industry on this proposal. While this proposal is consistent with measures being introduced in the US and UK, executive bonuses are usually based on a range of performance measures (including share price) so this measure may have limited practical application. If you would like more detailed information on these developments and their implications for business, please contact Tim Sandow at email@example.com for copies of the relevant KPMG Reform in Focus briefs. Balance executive and shareholder interests The Federal Government has tweaked the rules governing executive pay packages. KPMG's Tim Sandow looks at how they comply with the changes.