Employee Share Schemes: Regulation and Policy

Abstract

Through employee share schemes, employees have the opportunity to take up equity in the company for which they work. There are two distinct types of employee share schemes: ‘broad-based’ schemes that are open to the majority of employees within a company, and ‘narrow-based’ schemes that are only open to executive employees. Broad-based schemes - the focus of this paper - are an increasingly common and economically significant feature of the Australian corporate landscape. At the federal government level, they have been the focus of intermittent public policy interest. Most recently, as part of the 2009-10 Budget, the Treasurer announced significant changes to the taxation of these schemes. This announcement was met with outcry from a range of stakeholders and the Government was quick to concede that its proposals may have had the unintended consequence of discouraging the growth of broad-based employee share ownership in Australia. After a series of consultative measures, the Government substantially revised its reforms. Although broad-based employee share schemes have long enjoyed bipartisan political support, key issues surrounding their regulation continue to be contested. This paper identifies and discusses a number of these important policy issues, with particular reference to the recent major taxation reforms. Part II of the paper provides background by briefly outlining current evidence on broad-based employee share schemes in Australia. In Part III, we explain the extent to which these schemes have received support from Australia’s two major political parties. Part IV briefly outlines how these schemes are regulated under Australian law. In Part V, we discuss a number of important public policy issues which recur intermittently in public debates on employee share schemes. These issues include our limited knowledge of relevant company practice; the many available rationales for the promotion of employee share schemes; the nature, and extent, of the tax concessions designed to promote employee share ownership; and the extent to which the existing regulatory regime provides scope for loss of revenue through tax evasion. We conclude in Part VI by observing that although all political parties support the notion of employee ownership, the political will to support this with taxation concessions is tempered by the view that employee share schemes present the potential for abuse.