Your Crikey Daily
article yesterday “How does the ANZ CEO get buy on $43 a year” is
factually incorrect. Under ANZ’s approved Directors Share Plan:

  • Directors who forgo salary are entitled to receive shares to the
    value of remuneration forgone. These shares have a restriction period
    of between 1 and 10 years and are subject to forfeiture for serious
    misconduct.
  • For taxation purposes, Directors are taxed on the value of
    shares at the end of the deferral period and they are taxed on the
    value of the shares at the top marginal rate of 47 cents (plus 1.5
    cents Medicare Levy).

For example, if $100 in salary was
sacrificed to receive shares under the Plan on 1 January 2005 with a
two year deferral period, and the shares had a value of $150 on 1
January 2007, this would attract tax at the top marginal rate of 47c
(plus 1.5 cents Medicare Levy) on the full amount of $150.

Options
are taxed on exercise at the full marginal rate of 47 cents (plus 1.5
cents Medicare Levy) on the difference between the exercise price and
the share price at the date of exercise (unless an election is made to
be taxed on receipt of options).

It is very disappointing
Stephen that you would not check something like this before hand. The
details of the Director’s Share Plan are disclosed in the annual report
and I am always accessible and happy to check any point of fact out for
you before publication.

Stephen Mayne writes:

Similar arguments were proferred by my old boss Terry McCrann in the Herald Suntoday in another amusing spray that, once again, fails to mention Crikey by name, just like this piece from last week.

Okay,
so it seems the sacrifice issue is a tax deferral strategy and the CGT
discount arises with any gains made, of which there have been tens of
millions for John McFarlane. As I said yesterday, it would still be
very interesting to know exactly when and how much tax the bonny Scot
will pay on his $120 million-plus equity play since arriving in
Australia.

Of course, once he’s paid for the stock, there are
all those tidy fully franked dividends, but you can’t quibble too much
about these as ANZ have already paid tax on these earnings – at the
corporate rate of 30%.

Some of this comes down to how the equity
instruments are valued by the ANZ and there have been recent studies
which suggest systematic under-valuation of options by Australia’s
major corporates over the last five years.

Finally, if there is
absolutely no tax benefit, why did McFarlane take only $43 in cash
salary in 2004? This is an important debate to have begun and we
haven’t even started yet on the way tax breaks on terminations payments
are also rorted by CEOs. Bring it on!

Meanwhile, a tax accountant writes:

The
taxing of employee (including executive) shares is a very complex area
and not as simple as Stephen Mayne makes out. There are special
provisions in The Income Tax Assessment Act 1936 which covers the way
they are taxed (Division 13A). Check out this link from the ATO website, covering the taxing of employee shares.

Basically
if an employee is paid in shares, (and they do not pay anything for the
shares) the value of the shares must be included as assessable income
(taxed at you marginal rate) and not included as a capital gain. In
these circumstances if the shares are not qualifying shares then all of
their value is included as assessable in the year you receive them as
other income, not a capital gain.

If there are qualifying shares then you have a choice of 2 concessions.

Concession
1 allows you to defer the income to a later date (usually 3 years) and
include the full market value of the shares at that point as assessable
income (as other income, not capital gains).

Concession 2 (if
you elect in writing) allows you an exemption from including in your
income the first $1,000. The rest is included as income in the year you
receive it (as other income not capital gains).