Prime Minister Kevin Rudd has backed the crackdown on employee share schemes announced in the federal budget, despite growing criticism and threats of a Senate inquiry into the decision.
A string of companies have announced they have suspended or are reviewing their share schemes. While market giants such as National Australia Bank, Optus and Macquarie Group were among the first to move, smaller listed companies such as Noni-B, Peoplebank, Ceramic Fuel Cells, Savcor Group, Billabong and STW Communications have now effectively shut down their schemes.
It's similar story across the SME sector, according to Michael van Schaik, associate director at law firm Moore Stephens.
"Everybody has said ‘let's put our schemes on hold and we certainly won't be issuing shares or options'. They are questioning the viability of the schemes going forward, given that the tax benefits are only available to employees earning under $60,000. They are not the people who the schemes were targeted at," van Schaik says.
But the Government is holding firm. Finance Minister Lindsay Tanner claims the schemes are primarily a tax avoidance mechanism for high income earners, while Rudd said the changes, while unpopular, where necessary to help eventually restore the budget to surplus.
But Opposition Leader Malcolm Turnbull has seized on growing anger among the business community and described the changes as being among "the most controversial and unpopular elements in the budget". Independent senators Nick Xenophon and Stephen Fielding have threatened to launch a Senate inquiry if the Government does not clarify its position.
Van Schaik says it will be difficult for the Opposition to force the Rudd Government to change its decision, given "philosophical issues within the federal Labor party around the wealthy executives".
But van Schaik has questioned the Government's stance that employee share schemes are being "rorted" by executives.
While he concedes there may be some executives who are attempting to avoid tax by not declaring the exercise of options or shares in their tax returns, he argues that the tax office could have cracked down on this by better data matching or other mechanisms.
If the Government does not change its mind on employee share schemes, van Schaik believes companies may revert to what he calls "phantom schemes". Under these arrangements, a company does not actually give an employee shares or options, but sets out a nominal number of shares they would be entitled to if certain performance hurdles are met over a period of time. At the end of the period, the value of those nominal shares is calculated and a cash bonus is paid in lieu of shares.
Van Schaik points out that while the scheme works well for employees, it does not align shareholders and executives in the same way that equity does.
Companies furious over changes to employee share schemes
That actually didn't work as well as I thought it would for the majority of the staff, but for a significant and important minority (the kind you really want) it worked really well.
So now that's been eliminated as an option.
I guess it fits in with the Labor ethos of having workers and bosses and a big gap in between.
Neil