Home

Corporate & Commercial

Corporate & Commercial Insight | June 2009

PDF Download

This article is available in PDF format.

Insight-Corporate-Commercial-June-2009.pdf [Adobe Acrobat PDF - 631.81 KB]

Corporate & Commercial Insight

June 2009

Reform of taxation of employee share schemes

On the night of the Federal Budget, the Treasurer announced that the Federal Government intended to change the way employee share schemes were taxed with immediate effect.

The two key changes announced at that time were:

that all discounts on shares and rights issued under an employee share scheme would be assessed in the income year in which the shares and rights were acquired. There would be no ability to defer the assessment until a later time; and
the applicable tax exemption of $1,000 in relation to discounted shares or rights would only be available to taxpayers with an adjusted taxable income of less than $60,000.

In the Budget papers, the Treasurer indicated that the Government expected to receive an additional $200 million in revenue as a result of the changes.

These proposed changes were met by significant public negative reaction. Critics suggested that the changes would discourage the use of employee share schemes and reduce the access of employees to share ownership.

In response to that criticism, the Government announced that it would re-examine the proposed changes and explore alternatives.

On 5 June 2009, Treasury released a consultation paper containing a proposed revision to the changes and seeking further public comment. In the consultation paper, the Federal Government has indicated it proposes to modify the changes so that:

the income threshold for the tax exemption will be raised from $60,000 to $150,000;
a more limited deferral of the taxing point for certain employee share schemes meeting qualifying conditions will apply. In order to qualify, the rights obtained under the scheme must be subject to a genuine risk of forfeiture. Deferred tax treatment would therefore flow from the structure of the scheme rather than an election by the taxpayer to defer. It is also proposed there will be a maximum deferral period of either 7 years, on cessation of employment or when the employee can pass title to the share or right;
companies participating in employee share schemes will need to lodge annual statements with the Tax Office regarding affected employees and make a limited form of withholding in cases where an employee fails to provide their employer with a TFN or ABN;
the existing rules for valuing discounted and deferred shares and rights will be reviewed; and
the rules relating to the refund of income tax for forfeited benefits will be modified. A refund would not apply if the forfeiture or extinguishment of a right resulted from a decision of the taxpayer (including a decision not to exercise a right).

The consultation paper also proposes that the effective date of the changes be deferred until 1 July 2009.

Submissions have now closed and it remains to be seen what final form the proposed changes will take. A preliminary analysis of the proposals contained in the consultation paper suggests that some of the key implications of the revised measures will be as follows:

companies with employee share schemes that are intending that their employees will obtain access to deferred tax treatment will need to ensure that schemes are structured in a manner so that employees are eligible for deferred tax treatment;
schemes eligible for tax exemption will be able to offer the $1,000 tax exemption to employees with taxable income of less than $150,000, broadening the attractiveness of these schemes. However, it may be difficult for companies to assess the income level of all employees;

companies utilising employee share schemes will need to familiarise themselves and comply with the proposed new reporting and withholding requirements. These requirements were not originally announced on Budget night; and
moves by the Government to expand the availability of refunds in circumstances where rights are forfeited or extinguished are welcome. This will need to be taken into account when structuring employee share schemes.

Proposed new laws to limit ‘Golden Handshakes’

On 24 June 2009, the Federal Government introduced into Parliament the Corporations Amendment (Improving Accountability of Termination Payments) Bill 2009 (Bill). The Bill proposes amendments to the Corporations Act 2001 (Cth) to limit the termination payments that can be made to senior executives without shareholder approval.

The new laws will not apply retrospectively to existing contracts. They will only apply to contracts entered into or extended after commencement of the new laws. However, the variation of existing contracts may bring the contract within the scope of the new laws.

It is worth nothing that the Federal Government has also asked the Productivity Commission to review Australia’s framework for remuneration of directors and executives, and this may have further implications for these purposes.

Lowering the threshold for shareholder approval of termination benefits

Companies are currently required to obtain shareholder approval for termination payments that exceed 7 times the total annual remuneration of a director of the company or a related body corporate. The Bill lowers the threshold amount for shareholder approval to one year’s base salary, regardless of length of service.

This is likely to result in a material increase in the circumstances where shareholder approval is required.

Extending the scope to executives

The Bill expands the categories of individuals to which the rules will apply. If the company is a disclosing entity (for example, listed companies and some managed investment schemes), the new laws will apply to persons holding a “managerial or executive office”. This includes not only directors, but also key management personnel and the 5 most highly remunerated officers (if different) of the entity (i.e. the officers named in the company’s remuneration report). For all other entities, the existing rules continue to apply to company directors.

Expanded definition of termination benefit

It is currently unclear whether certain types of payments meet the definition of a termination benefit and therefore require shareholder approval. The Bill clarifies and expands the definition of a termination benefit which requires shareholder approval to include:

accelerated or automatic vesting of options;
payments made in lieu of notice of termination of employment;
any type of pension;
amounts paid as a voluntary out of court settlement; and
superannuation contributions in excess of the statutory minimum.

The draft regulations provide that a termination benefit does not include:

deferred bonuses (that is, bonuses that have been earned but not yet paid);
payments from a defined benefits superannuation scheme that was in existence before the regulations commenced; and
benefits paid in respect of leave of absence which an executive or director is entitled to under a contract of employment, law or other industrial instrument.

Timing of shareholder vote

Currently, shareholder approval must be obtained by a resolution passed at a general meeting, which can be held at any time before the benefit is paid. However, the Bill provides that any shareholder vote on the approval of a termination benefit must be held after the director or executive has departed from their position. This is intended to ensure that shareholders are in a better position to assess whether the proposed termination benefit is appropriate, as shareholders may have a better understanding of how the director or executive has performed before exercising their vote.

Requirement to repay unauthorised termination benefit

The Bill requires that any unauthorised termination benefits must be repaid immediately by the director or executive to the company.

Increased penalties

The penalties for breach of these requirements have been increased to $19,800 (up from $2,750) for individuals, and $99,000 (up from $16,500) for corporations, while retaining the option of 6 months imprisonment.

Implications for employers

The proposed new laws will have significant implications for the remuneration and termination entitlements of directors and senior executives. New contracts for senior executives and key management will have limits on termination payments. The limits may also adversely affect the ability of Australian companies to attract talented executives. Companies will need to carefully consider what they pay their departing executives and how to structure the executive’s remuneration under their contract.

Goodbye “Transmission of Business”

The introduction of the Fair Work Act 2009 (Cth) (FW Act) will replace the current “transmission of business” test with its new “transfer of business” provisions

From 1 July 2009, the “transmission of business” provisions that existed under the Workplace Relations Act 1996 (Cth) (WR Act) will be replaced by the concept of a “transfer of business” and a different test will be used to determine whether industrial instruments will transfer between employers.

The transfer of business provisions will be activated in a broader range of circumstances. In particular, the focus will no longer be on the character of the “business” of the old employer and whether the new employer has in some way taken over that “business”. Instead, the test will be whether there is “transferring work” between the two employers and whether one or more relevant connections exist between them.

The new test

The new test contained in the FW Act provides that there will be a transfer of business from the old employer to the new employer if:

the employment of an employee of the old employer has terminated and that employee becomes employed by the new employer within three months of the termination;
the work performed by the employee for the new employer is the same (or substantially similar) as the work previously performed for the old employer; and

there is a connection between the old employer and new employer.
The connection that is required to exist between the old employer and the new employer will not only encompass transactions where there has been a transfer of assets from the old employer to the new employer (as is currently the case under the WR Act). Under the FW Act, there will also be a connection between the two employers in the following circumstances:

the old employer outsources work to the new employer;
the new employer ceases outsourcing work to the old employer; and
the new employer is an associated entity of the old employer.

Other changes

Other significant changes in respect of these provisions are:

there will be no limit on the period of time that the transferred instrument will apply. This is unlike the WR Act, where transmitted instruments only applied to a new employer for 12 months at the most; and
a transferred instrument can, in some circumstances, apply to new employees engaged by the new employer after the transfer of business has occurred.

Implications for employers

It will be more difficult to structure deals that avoid industrial instruments transferring with employees.
New employers will need to consider the ongoing employment costs that may be incurred as a result of transferring instruments, especially given that they apply indefinitely.
As the changes commence on 1 July 2009, careful consideration should be given to whether any impending transactions or arrangements will complete before or after this date.

ASIC lifts ban on covered short selling of financial securities

With effect from 25 May 2009, ASIC has lifted the ban which previously applied to the covered short selling of financial securities. In announcing its decision to lift the ban, ASIC indicated that it had reviewed the prevailing market conditions and considered that it was appropriate to lift the ban. However, ASIC also stated that it would consider reimposing the ban if market conditions were to change in a way that would warrant the reimposition of a ban.

A summary of the key changes in the law with respect to short selling since the initial ban imposed on short selling on 21 September 2008 is as follows:

naked short selling (short selling securities without a legally binding securities lending arrangement in place at the time of the short sale) remains generally prohibited;
covered short selling (short selling where a legally binding securities lending arrangement is in place at the time of the short sale) is no longer banned with respect to both financial and non-financial securities; and
market participants are required to report daily on gross short sales and ASX will produce and disseminate a report to the market with respect to covered short selling the day after trading.

ASX has also been continuing to work towards developing software capable of supporting real time ‘tagging’ or identification of short sales in its integrated trading system.

ASIC has indicated that manual reporting of total daily gross short sales will continue until ‘tagging’ becomes mandatory practice under ASX market rules.

Recent Transactions

Speedy Sale of SAP Business

Holding Redlich acted for the shareholders of Supply Chain Consulting in the sale of the company to Fujitsu for $48 million. Partners Dan Pearce and David Sarkin led a team which restructured the Supply Chain group to spinout a software business being retained by the vendors, negotiated the redemption of outstanding convertible notes, and settled all documentation relating to the sale of the SAP business across Australia, Thailand and the Philippines.
“For a transaction of this scale, there was a high degree of complexity, including due to the range of vendors and the geographical spread of operations” said Dan Pearce. “The parties needed to achieve resolution in a very short time frame, and given the need to co-ordinate various work flows it was ultimately decided that execution and completion would take place simultaneously. Our clients ended up receiving their proceeds within 6 working days after the Purchaser’s board approved the deal.”

Sale of one of Australia’s largest helicopter operations

Holding Redlich acted for the shareholders of Australian Helicopters in the sale of the company, one of the largest helicopter operators on the East Coast to Archer Capital, for an undisclosed sum. David Walker led the Holding Redlich team on the transaction, which included the purchase of single and multi-engine helicopters that provide emergency services to police, fire fighters, medical staff, military, tourism operators and heavy industry.

Reform of taxation of employee share schemes

On the night of the Federal Budget, the Treasurer announced that the Federal Government intended to change the way employee share schemes were taxed with immediate effect.

The two key changes announced at that time were:

that all discounts on shares and rights issued under an employee share scheme would be assessed in the income year in which the shares and rights were acquired. There would be no ability to defer the assessment until a later time; and
the applicable tax exemption of $1,000 in relation to discounted shares or rights would only be available to taxpayers with an adjusted taxable income of less than $60,000.

In the Budget papers, the Treasurer indicated that the Government expected to receive an additional $200 million in revenue as a result of the changes.

In response to that criticism, the Government announced that it would re-examine the proposed changes and explore alternatives.

the income threshold for the tax exemption will be raised from $60,000 to $150,000;
a more limited deferral of the taxing point for certain employee share schemes meeting qualifying conditions will apply. In order to qualify, the rights obtained under the scheme must be subject to a genuine risk of forfeiture. Deferred tax treatment would therefore flow from the structure of the scheme rather than an election by the taxpayer to defer. It is also proposed there will be a maximum deferral period of either 7 years, on cessation of employment or when the employee can pass title to the share or right;
companies participating in employee share schemes will need to lodge annual statements with the Tax Office regarding affected employees and make a limited form of withholding in cases where an employee fails to provide their employer with a TFN or ABN;
the existing rules for valuing discounted and deferred shares and rights will be reviewed; and
the rules relating to the refund of income tax for forfeited benefits will be modified. A refund would not apply if the forfeiture or extinguishment of a right resulted from a decision of the taxpayer (including a decision not to exercise a right).

The consultation paper also proposes that the effective date of the changes be deferred until 1 July 2009.

companies with employee share schemes that are intending that their employees will obtain access to deferred tax treatment will need to ensure that schemes are structured in a manner so that employees are eligible for deferred tax treatment;
schemes eligible for tax exemption will be able to offer the $1,000 tax exemption to employees with taxable income of less than $150,000, broadening the attractiveness of these schemes. However, it may be difficult for companies to assess the income level of all employees;

companies utilising employee share schemes will need to familiarise themselves and comply with the proposed new reporting and withholding requirements. These requirements were not originally announced on Budget night; and
moves by the Government to expand the availability of refunds in circumstances where rights are forfeited or extinguished are welcome. This will need to be taken into account when structuring employee share schemes.

Proposed new laws to limit ‘Golden Handshakes’

Lowering the threshold for shareholder approval of termination benefits

This is likely to result in a material increase in the circumstances where shareholder approval is required.

Extending the scope to executives

Expanded definition of termination benefit

accelerated or automatic vesting of options;
payments made in lieu of notice of termination of employment;
any type of pension;
amounts paid as a voluntary out of court settlement; and
superannuation contributions in excess of the statutory minimum.

The draft regulations provide that a termination benefit does not include:

deferred bonuses (that is, bonuses that have been earned but not yet paid);
payments from a defined benefits superannuation scheme that was in existence before the regulations commenced; and
benefits paid in respect of leave of absence which an executive or director is entitled to under a contract of employment, law or other industrial instrument.

Timing of shareholder vote

Requirement to repay unauthorised termination benefit

The Bill requires that any unauthorised termination benefits must be repaid immediately by the director or executive to the company.

Increased penalties

Implications for employers

Goodbye “Transmission of Business”

The introduction of the Fair Work Act 2009 (Cth) (FW Act) will replace the current “transmission of business” test with its new “transfer of business” provisions

The new test

The new test contained in the FW Act provides that there will be a transfer of business from the old employer to the new employer if:

the employment of an employee of the old employer has terminated and that employee becomes employed by the new employer within three months of the termination;
the work performed by the employee for the new employer is the same (or substantially similar) as the work previously performed for the old employer; and

there is a connection between the old employer and new employer.
The connection that is required to exist between the old employer and the new employer will not only encompass transactions where there has been a transfer of assets from the old employer to the new employer (as is currently the case under the WR Act). Under the FW Act, there will also be a connection between the two employers in the following circumstances:

the old employer outsources work to the new employer;
the new employer ceases outsourcing work to the old employer; and
the new employer is an associated entity of the old employer.

Other changes

Other significant changes in respect of these provisions are:

there will be no limit on the period of time that the transferred instrument will apply. This is unlike the WR Act, where transmitted instruments only applied to a new employer for 12 months at the most; and
a transferred instrument can, in some circumstances, apply to new employees engaged by the new employer after the transfer of business has occurred.

Implications for employers

It will be more difficult to structure deals that avoid industrial instruments transferring with employees.
New employers will need to consider the ongoing employment costs that may be incurred as a result of transferring instruments, especially given that they apply indefinitely.
As the changes commence on 1 July 2009, careful consideration should be given to whether any impending transactions or arrangements will complete before or after this date.

ASIC lifts ban on covered short selling of financial securities

A summary of the key changes in the law with respect to short selling since the initial ban imposed on short selling on 21 September 2008 is as follows:

naked short selling (short selling securities without a legally binding securities lending arrangement in place at the time of the short sale) remains generally prohibited;
covered short selling (short selling where a legally binding securities lending arrangement is in place at the time of the short sale) is no longer banned with respect to both financial and non-financial securities; and
market participants are required to report daily on gross short sales and ASX will produce and disseminate a report to the market with respect to covered short selling the day after trading.

ASX has also been continuing to work towards developing software capable of supporting real time ‘tagging’ or identification of short sales in its integrated trading system.

ASIC has indicated that manual reporting of total daily gross short sales will continue until ‘tagging’ becomes mandatory practice under ASX market rules.

Recent Transactions

Speedy Sale of SAP Business

Holding Redlich acted for the shareholders of Supply Chain Consulting in the sale of the company to Fujitsu for $48 million. Partners Dan Pearce and David Sarkin led a team which restructured the Supply Chain group to spinout a software business being retained by the vendors, negotiated the redemption of outstanding convertible notes, and settled all documentation relating to the sale of the SAP business across Australia, Thailand and the Philippines.
“For a transaction of this scale, there was a high degree of complexity, including due to the range of vendors and the geographical spread of operations” said Dan Pearce. “The parties needed to achieve resolution in a very short time frame, and given the need to co-ordinate various work flows it was ultimately decided that execution and completion would take place simultaneously. Our clients ended up receiving their proceeds within 6 working days after the Purchaser’s board approved the deal.”

Sale of one of Australia’s largest helicopter operations

Holding Redlich acted for the shareholders of Australian Helicopters in the sale of the company, one of the largest helicopter operators on the East Coast to Archer Capital, for an undisclosed sum. David Walker led the Holding Redlich team on the transaction, which included the purchase of single and multi-engine helicopters that provide emergency services to police, fire fighters, medical staff, military, tourism operators and heavy industry.