NO.026

GOVERNMENT REAFFIRMS THE EXISTING CORPORATE TAXATION TREATMENT OF OPTIONS

GRANTED TO EMPLOYEES

On 19 February 2004 the International Accounting Standards Board (IASB) issued

International Financial Reporting Standard 2 Share-based Payment. Under this

new international accounting standard companies will be required to expense

the fair value of options granted to employees and third parties.

The IASB’s proposed changes have raised the question of whether a corporate

tax deduction should be made available for the cost of options granted to employees.

This would include the cost of options issued over unissued shares.

Broadly, under the current law an income tax deduction is not available as

the normal basis for providing a taxation deduction is that a business has incurred

an economic loss or outgoing. It is the Government’s view that the current treatment

should remain and that there be no new income tax deduction for the issuing

of options.

Under current law, deductions are allowed for certain qualifying options issued

under employee share schemes. The Government recognises the important role of

existing concessional taxation arrangements for qualifying employee share schemes

play in aligning the interests of employees and employers, and these arrangements

will not change. Allowing a deduction for options issued to employees beyond

the concessions currently available for employee share schemes would have a

significant negative impact on Government revenue.

In reaffirming the current taxation treatment, I note the raft of positive

reforms contained in the Corporate Law Economic Reform Program (Audit Reform

and

Corporate Disclosure) Bill 2003, which was introduced into Parliament on 4

December 2003. The Bill is designed to improve the operation of the market by

promoting transparency, accountability and shareholder activism. The Bill takes

a balanced approach to corporate regulation, containing measures to enhance

auditor independence, achieve better disclosure outcomes and improve enforcement

arrangements for corporate misbehaviour, whilst still fostering innovation and

wealth creation. In relation to remuneration, the Bill promotes constructive

communication between shareholders and boards to empower shareholders to exercise

their rights where they disagree with the boards’ remuneration policies

and practices.

MELBOURNE

30 April 2004

Contact: Amanda Kennedy

03 9650 0244