The outcry over the proposed changes to employee share schemes represents an interesting failure of the Rudd Government to predict the effect of a policy on the electorate.
Yesterday Assistant Treasurer, Chris Bowen, walked into parliament to continue the Government’s damage control over the issue, admitting that they could have "calibrated this better". As of last Sunday, the policy is getting a complete re-think, with Bowen and the Treasurer, Wayne Swan, promising to release an options paper on it within the next 10 days. That promise was itself a significant backdown from a confrontation on the issue which had been building since budget night on 12 May.
At that time Wayne Swan had left thousands of Australian workers puzzled when he announced a crackdown on the tax breaks that come with employee share schemes.
The outcry was predictable. The Treasurer had offered virtually no explanation of his decision, beyond saying in his budget papers that he was aiming to "reduce tax avoidance opportunities".
During debate in Parliament yesterday, the Opposition had intensified its criticism of the Government over the issue, condemning the Government for damaging the schemes, which give some 550,000 Australians at least a small stake in their employers’ businesses. In response, Bowen finally began to make some headway, saying that both Treasury and the Tax Office are very concerned about the level of tax avoidance in the area.
And, although Bowen did not say so directly in his speech, it was clear he was trying to shift the focus back from shop floor workers to greedy executives, implying that it was they who had forced the Government to swing its axe.
Tax experts contacted by newmatilda.com before Bowen’s speech had predicted this move from him. Although he declined to name names, saying that it would be improper, Bowen gave Parliament the example of two people who had used these provisions to avoid tax, and who had been forced to repay a total of some $1 million after their affairs had been audited. The amounts of money in those examples made it clear that both involved executives rather than ordinary workers.
And that’s the core of the issue. Employee share schemes, essentially, come in two types, the broad and the narrow. The broad schemes are those which offer shares, often at a discount, to virtually all the permanent full- and part-time workers, employed by a particular company. The narrow ones are those that are restricted to a company’s most senior executives. They are usually much more lucrative than the broad schemes, and, as Bowen demonstrated, they can be used more readily for certain types of tax avoidance that can be very hard to prove (and indeed both cases he referred to had been expensive to pursue).
From Bowen’s words it appears that greedy executives were the only targets all along. But while that may be true, it raises questions over how the Government, enjoying the advice of Treasury and the Tax Office, could have imagined that the policy it announced on budget night would alarm only them.
The Government’s original plan promised to end an arrangement that sounds reasonable enough. When the average person joins a share scheme, there is a time lag before they are obliged to pay tax on their shares. The purpose of that time concession is to avoid forcing a people to pay tax up front on an asset that, for a variety of reasons, may not have actually been of any benefit to them yet.
Unfortunately, from the tax collectors’ point of view, by the time shareholders are obliged to report these assets amnesia has set in. Some of these memory losses are genuinely accidental, and some are not. There is clearly concern among Treasury and the Tax Office that the deliberate omissions are costing the public purse a considerable sum — and that those responsible are in the narrow, executive schemes. After all, as one expert told newmatilda.com, there isn’t all that much money involved in the more proletarian schemes.
The Government’s original budget decision, on these tax breaks, was simple enough. Swan declared then that he would prevent people benefiting from these schemes by deferring their tax obligations, and restrict the tax exemption of $1000 offered to those who pay up front, to people earning less than $60,000. In the budget papers it was estimated that the Government would raise an extra $200 million over the next four years through this crackdown.
But that’s where the unusual agreement between unions and business has helped the Opposition make things hard for the Government, since setting the cut-off at $60,000 means affecting middle Australia. Although there is reason to doubt whether the changes would have actually been significant for these middle-income earners, there is no doubt that they are affected — even if the effect is negligible.
That move has left the Government open to the accusations it is now copping — that Labor hates employee share schemes because they turn workers into little capitalists and tax-avoiders.
For the record, tax breaks for employee share schemes were originally introduced by the Keating Labor government back in 1995. But conservative politicians have mostly been more enthusiastic about employee share schemes than Labor MPs.
Several years ago, conservative members of a committee chaired by Brendan Nelson produced a report, called Shared Endeavours, which recommended a slew of official measures to encourage such schemes. Labor MPs then produced a dissenting report, and doubts about the Rudd Government’s support for such schemes persist.
An academic study, released just last month by the Employee Share Ownership Project, concluded: "The extent to which the current Labor Government supports employee share ownership among non-executive employees is unclear." That statement, just weeks before the budget, now seems positively prophetic.
Even so, the Opposition Leader, Malcolm Turnbull, went a bit far in an address to Liberal Party members last weekend when he attributed the Government’s decision to bitter, class war attitudes, describing the Government’s budget announcement as yet "another example of the very bitter ideological approach" of the Rudd Government. "Every employee share scheme in Australia is being shut down today," Turnbull said, claiming that it was all part of a Labor attack on aspirational voters.
That’s pretty clearly just rhetoric, but it has added to the total pressure, halting the policy and embarrassing Rudd and Labor in general, and Swan and Bowen in particular.
As is traditional in such circumstances — the joint statement from the Treasurer and his Assistant Treasurer was couched in almost impenetrable language: "Given the community concerns with the proposed changes and the possible unintended adverse impacts on employee share scheme arrangements for ordinary employees, the Government will be fast tracking the consultation process beginning with the release of a policy options paper in the next fortnight."
A fortnight from last Sunday. That’s not far off now. Expect them to have separated the big fish from the little ones by then.