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[Date Prev][Date Next][Thread Prev][Thread Next][Date Index][Thread Index] RE: EOnation: UK Tax Policy and Unanticipated Consequence
Geoff
My point on unlisted companies is that share plans need to be very
carefully constructed - otherwise they turn into "ponzi schemes".
I have seen clients fall into a trap whereby they lead employees to
believe that they will be able to turn the shares into cash fairly
readily when they need to. Indeed, unless employees do believe that
they can cash in their shares, they will be less motivated by the idea
of taking part of their remuneration in shares.
The problem is that, in the long term, the company cannot provide a
market in the shares. As time goes by, more and more employees want to
sell their shares. Companies address this in a number of
unsatisfactory ways:
1. Match every seller with a buyer - but unless employee numbers
continue to grow, there will eventually be an imbalance of buyers and
sellers. That either results in the price having to fall to a level
which matches supply and demand, or some sort of rationing system
which means that sellers have to hold onto shares longer than they
want. Either outcome is unsatisfactory for the sellers.
2. Intervene in the market itself, possibly by setting up an employee
trust or, where permitted, buying shares into treasury. But this ties
up cashflow and capital which could possibly be more usefully employed
in growing the business.
3. Find an outside investor to take up the excess shares, possibly
through a trade sale or IPO. But this may be counter to the
aspirations of the original owners.
Therefore I would always warn clients to be very cautious about the
expectations they raise in the employees. In some ways it is easier to
use a "co-operative" kind of structure where the employee owners have
no right to capital growth, only to income. For example in the UK, the
John Lewis Partnership (a retail group) is "owned" by its employees,
in the sense that employees elect the Board and receive annual profit
distributions. But they do not have rights to capital growth. The
problem with this is that it reduces the incentive to invest for
growth.
______________________________ Reply Separator
_________________________________
Subject: Re: EOnation: UK Tax Policy and Unanticipated Consequences
Author: "Geoff Price" <SMTP:gprice@rpcplanmanagers.com.au> at UK
Date: 20/04/2001 14:37
As Australia has a less forgiving capital gains tax regime, an environment
of tax upon disposal will be a more effective share retention incentive.
Ideally, share retention is most effectively created by the encouragement of
well diversified portfolios, which are created by the US 401k style plans.
However unfortunately this concept is still light years ahead of Australian
policy formation, and politically highly difficult.
Australia certainly needs a more Proshare type body, to pursue a broader
share ownership policy strategy, which obviously includes employee share
plans. As we all know, employee share plans continue to create more "first
time shareowners", than any other cause or phenomenon. this is evidenced
each year by the ASX's own surveys of investors.
Right now, the focus in Australia is to effect some "housekeeping" type
changes plus some politically acceptable upgrading of Division 13A of the
Income tax Assessment Act, which can make some significant contribution to
our strategy and policy of "wider and deeper" employee share ownership. This
includes a modest increase in tax exemptions coupled with all gains on any
employee shares, to be taxed concessionally as "gains", rather than as
income and therefore at higher tax rates.
Addressing unlisted company concerns centres on simplifying the valuation
requirements, and prospectus documentation requirements. It may also be
possible to obtain some additional fiscal relief by "carving out" emerging
type companies, and providing them with some additional relief which
employee/executives in more mature industries would not get. We also see
options as the most practical form of employee equity for sharing purposes,
as they answer key govt concerns about employee risks, and loss of
entitlements.
regards
Geoff Price
Chairman
AEOA Tax and Economics Committee
----- Original Message -----
From: Shann Turnbull <sturnbull@mba1963.hbs.edu>
To: Langley, Aidan (UK) <alangley@deloitte.co.uk>; "COG National List"
<EOnation@cog.kent.edu>; "Jacquelyn Yates" <Yates@salem.kent.edu>; Sean
Conlan <sean.conlan@bnpparibas.com.au>; Chris Costello
<rpc@remuneration.com.au>; Brad Hooper <bhooper@mail.fairfax.com.au>; Gareth
Hunt <huntga@cba.com.au>; Chris Miljak <chris_miljak@lendlease.com.au>; Tim
Mitchell <tmitchell@watkins.minister.nsw.gov.au>; Geoff Price
<gprice@rpcplanmanagers.com.au>; David Spedding <sped@deakin.edu.au>; Chris
Costello <rpc@remuneration.com.au>; David White
<david.white@vodafone.com.au>; Allan Grieg (Public Officer)
<ALAN.GREIG@add.nsw.gov.au>; Gary Scarrabelotti (Exec. Cons.)
<aequumpl@ozemail.com.au>
Sent: Friday, 20 April 2001 7:50
Subject: RE: EOnation: UK Tax Policy and Unanticipated Consequences
> Follow up on COG policy discussion. You can sign up and contribute your
> thoughts directly at http://cog.kent.edu/. They would be interested in
the
> Australian situation. I have contributed the response by Geoff Price to
> the their discussion group.
>
> Shann
>
> At 06:39 PM 20/4/2001, Langley, Aidan (UK) wrote:
> > Dear Jacquelyn
> >
> > I didn't mean to suggest that the AESOP won't encourage employee
> > shareholding; it certainly will do that - but only for the
five-year
> > holding period.
> >
> > Once that expires, the only reason to keep the shares in the AESOP,
> > rather than spend the cash or diversify the investment, is the
capital
> > gains tax relief. And that is only useful to a small minority of
> > employees.
> >
> > The reason for this is that there is an annual exemption for the
first
> > GBP 7,500 of realised gains on investments, or GBP 15,000 for a
> > married couple. In US dollar terms this is around $12,500 or
$25,000.
> > You don't pay the capital gains tax unless your gains exceed this
> > exemption amount.
> >
> > Only about 5% of the UK population actually have investment
portfolios
> > which are big enough to make annual realised gains of that
magnitude,
> > so only about 5% ever pay capital gains tax.
> >
> >I agree your point that employees will not retain their shares unless
> >compelled
> >to do so. The economic pressures on them to sell or diversify are very
> >strong.
> >
> >As to whether Government foresaw this, I think Government is aware that
it
> >only
> >has a limited number of tools with which to affect people's behaviour,
and
> >the
> >CGT relief was the only tool available to encourage shareholding beyond
the
> >five-year period.
> >
> >Government could, I suppose have lengthened the compulsory holding period
> >to,
> >say, seven or ten years. But Government has to rely on employers to
> >establish
> >AESOPs and introduce them. Employees would have regarded a seven-year
period
> >as
> >too long, so employers would have been less inclined to introduce AESOPs.
> >
> >Financial education is indeed recognised as important, but the actual use
of
> >
> >these in practice is patchy. This is due to cost constraints on HR
> >departments
> >in employers. Certainly, whenever I am advising a client on a new AESOP I
> >will
> >stress the importance of financial education, but many clients will not
have
> >a
> >budget to pay for the additional consulting work required. On the other
> >hand,
> >there are shining examples of companies which are willing to invest in
this
> >area, and, yes, those tend to be high-performing companies. BP Amoco, a
> >company
> >I know well, is an example.
> >
> >We have an organisation here called ProShare (http://www.proshare.org.uk)
> >which
> >is very good at providing financial education services to employees.
> >
> >On a separate point, has this group discussed the practical difficulties
of
> >operating employee share plans in unquoted companies? If so, could you
> >direct me
> >to the thread of correspondence and I might want to add some thoughts
> >
> >
> >
> >______________________________ Reply Separator
> >_________________________________
> >Subject: EOnation: UK Tax Policy and Unanticipated Consequences
> >Author: "Jacquelyn Yates" <SMTP:Yates@salem.kent.edu> at UK
> >Date: 20/04/2001 04:01
> >
> >
> >Dear Aidan, I would not have realized that the AESOP policy wouldn't
> >encourage
> >employee shareholding -- it sounds like such a good deal. I am wondering
> >how it
> >is that most employees wouldn't be liable for some capital gains tax.
What's
> >the
> >reason for that? Is capital gains tax in the UK progressively structured
> >and
> >proportional to income?
> >
> >Your point shows that well-intentioned fiscal incentives can be perverse.
Do
> >you
> >think the Government had any idea of this problem when they adopted the
new
> >policy?
> >
> >Your response pushed me further in thinking that if government policy
> >doesn't
> >compel employees to hold their shares for a long period, they probably
won't
> >do
> >so.
> >
> >I guess that shareholding is a also new experience for the average
employee,
> >and
> >that education is needed before they can see how the benefits can work.
> >Most
> >employees don't understand the management of enterprises, and they don't
> >have
> >enough information to connect their activities in the cubicle or on the
shop
> >
> >floor with improvement in stock value. Nor do they have the skills
needed
> >to
> >convert their individual knowledge of how to improve the enterprise into
a
> >common plan of action.
> >
> >U.S. research shows that employee-owned companies outperform their
> >traditional
> >counterparts only when there is employee participation in firm management
> >and
> >governance. And participation is the best kind of education --
experiential
> >
> >education.
> >
> >What kinds of employee education and training are happening in the AESOP
> >companies?
> >
> >
> >
> >
> >--
> >Jacquelyn Yates, Ph.D.
> >Political Science
> >Kent State University - Salem
> >2491 S.R. 45 South
> >Salem, OH 44460
> >
> >yates@mail.salem.kent.edu
> >FAX 330-332-9256
> >Tel. 330-337-4282
> >
> >
> >
> >--
> >---------------------------------------------------------------------
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>
> Shann Turnbull Ph.D.
> P.O. Box 266 Woollahra, Sydney, Australia, 1350
> Ph: +612 9328 7466 office; +612 9327 8487 home; Fax: +612 9327 1497;
> Life long E-mail:
> sturnbull@mba1963.hbs.edu Alternate:sturnbull@optusnet.com.au
> http://members.optusnet.com.au/~sturnbull/index.html
> Papers at: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=26239
> with other papers & book at http://cog.kent.edu/library.html
---------------------------------------------------------------------
IMPORTANT NOTICE.
This communication contains information which is confidential
and may also be privileged.
It is for the exclusive use of the intended recipient(s).
If you are not the intended recipient(s) please note that any
form of distribution, copying or use of this communication or
the information in it is strictly prohibited and may be unlawful.
If you have received this communication in error, please return
it with the title "received in error" to IT.SECURITY.UK@deloitte.co.uk
then delete the email and destroy any copies of it.
This communication is from Deloitte & Touche whose principal office
is at Stonecutter Court, 1 Stonecutter Street, London EC4A 4TR, United
Kingdom. A list of partners' names is available at this address.
Authorised by the Institute of Chartered Accountants in England
and Wales to carry on investment business.
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