Union campaign alleviates stock options fallout

The unions heavily lobbied their former member Treasurer Wayne Swan to relax changes to the employee share schemes that crippled businesses and startups.

As businesses, associations, and investors collectively formed a groundswell of discontent to the stock options changes, the opposition, backed by independent senators, jumped onboard this rising tide in May, and successfully organised a Senate inquiry that would uncover exactly where the government went wrong.

In August, the Senate Economics References Committee inquiry into taxation arrangements for employee share schemes recommended that the government delay the changes to consider other appraisals of the schemes, namely the exhaustive 476-page Productivity Commission report on executive remuneration in Australia, and the Henry Tax Review, due to be released next year.

The Labor Senators' Dissenting Report rejected this recommendation.

This isn't the first time that this has happened.

In 2000, when Liberal leader John Howard was almost midway through his decade-long tenure as Australia's prime minister, the House of Representatives Standing Committee on Employment, Education, and Workplace Relations organised an inquiry into employee share ownership, which was then governed by Division 13A of the Income Tax Assessment Act 1997.

The committee's Labor members dissented in their report to the committee. They wanted to close what they saw as loopholes exploited by high-net worth individuals that used "executive employee share schemes" to dodge taxes.

"Many of these arrangements are designed and marketed by aggressive tax planners and are described by the ATO as "blatant, artificial and contrived," the senators wrote in the report.

The Financial Services Union revived this claim in its submission to the 2009 Senate inquiry, which also accused the former Coalition government of enabling the tax dodge when it dismissed two thirds of the committee's 45 recommendations.

"The FSU believes that the failure of the then government to move to address the identified loopholes for aggressive tax planning was both an opportunity and revenue lost."

This course of events no doubt left a lasting impression on a young Wayne Swan, who had started to climb the ranks of the Labor Party after a long apprenticeship at the Australian Workers Union, but was still some years away from being picked as shadow treasurer by former leader Mark Latham.

Swan would get his chance in 2009, when the public turned on highly paid executives in the post-GFC financial funk.

For a treasurer who needed to use every trick to pump up the Budget, Swan found his cause: A crackdown on tax dodging and rich executives.

Politicians are used to seeing their policies criticised, but Swan couldn't possibly predict such a hostile reception when he smuggled in his form of economic justice in May 2009.

Regardless, the government ignored the majority of the outrage from stakeholders who were vehemently opposed the new rules.

It did, however, meekly institute one major change — which happened to be the only request that was heavily lobbied for by the powerful unions.

Previously employees had the ability to pay income tax upfront and receive an AU$1,000 tax exemption, but this became restricted to employees with income below AU$60,000.

The unions feared a backlash from their members — Aussie battlers who would no longer be granted small share packages by their benevolent employers in the mining and construction industries. After they pleaded their case in the media and through other avenues, the government raised the cap for the AU$1,000 tax-free exemption to AU$180,000.

"This debacle is a window into Labor's economic incompetence and total lack of understanding of the modern workplace," crowed the then opposition assistant treasury spokesman Tony Smith.

Swan's acquiescence would cost the government more than a quarter of its meagre fortune.

On December 10, 2009, Swan's deputy, Assistant Treasurer Nick Sherry, admitted as much when he presented the annual awards for the Australian Employee Ownership Association at the Unions NSW Auditorium.

The first point on his agenda that explained the government's motives was the requirement to satisfy the election promise — and secure the appropriate votes — that the Labor Party would prove its economic credentials as it manufactured a budget surplus.

When the changes were first announced in May, Swan promised that it would deliver AU$200 million in forward estimates.

But buried midway through a speech delivered in the silly season that precedes the Christmas break, Sherry casually mentioned that now only AU$135 million would be booked.

"The government's reforms to employee share schemes will allow us to continue to encourage employee ownership in Australia, while protecting the integrity of the tax system," said Sherry, now an executive with Ernst & Young. "The government will continue to work with business to encourage employee ownership in Australia."

There is some irony that he espoused the importance of corporate governance in his next point.

"The employee share scheme reforms are also an important part of improving corporate governance arrangements in Australia," he said.

Earlier this year, Swan admitted that he would not deliver the much-hyped budget surplus, which has left a serious question mark over the reasons used to justify the initial changes to the employee share schemes.

Tomorrow: How the industry has responded to the restrictions.