Federal Budget 2021: Secret $550m tax break for fat cat CEOs

Some of the richest executives in Australia are about to get a $550 million tax break under a new measure tucked quietly away in the budget papers.

CEOs and other globetrotting senior executives are set to get a $550 million tax break under a little-known measure quietly listed in the 2021 Budget papers.

Under the move, employees who are lured to companies with big share packages – a common practice for chief executives and other senior managers – will no longer have to pay tax on those shares when they leave the company.

Instead they will be able to defer paying tax on them for up to 15 years.

The move is expected to cost the government more than half a billion dollars in lost revenue - $345 million in 2023-24 and $205 million in 2024-25.

The Budget estimates that this cost will be offset by the payment of previously deferred tax, although the result will still obviously leave the government $550 million short of where it otherwise would have been.

It is understood that the move was made to bring Australia into line with the arrangements in other countries and therefore make it more competitive in attracting international talent to Australian companies.

It is also understood to be in line with a number of submissions to a House of Representatives committee inquiry into the matter, although the committee is yet to hand down its recommendations.

The Employee Share Scheme is a process by which companies offer shares and other financial products as an incentive to employees, often at the senior level, but the employees can defer paying tax on those products.

“The Government will remove the cessation of employment taxing point for the tax- deferred Employee Share Schemes (ESS) that are available for all companies,” Budget Paper 2 states.

Treasurer Josh Frydenberg made no mention of the tax break on budget night. Picture: Sam Mooy/Getty Images

“Employers use ESS to attract, retain and motivate staff by issuing interests such as shares, rights (including options) or other financial products to their employees, usually at a discount.

“Currently, under a tax-deferred ESS, where certain criteria are met employees may defer tax until a later tax year (the deferred taxing point).”

The deferred taxing point is the earliest of:

*cessation of employment

*in the case of shares, when there is no risk of forfeiture and no restrictions on disposal

*in the case of options, when the employee exercises the option and there is no risk of forfeiting the resulting share and no restriction on disposal

*the maximum period of deferral of 15 years.

Execs who received big share packages will be able to defer tax when leaving the company for up to 15 years.

“This change will result in tax being deferred until the earliest of the remaining taxing points,” the Budget states.

The Government says it will also “reduce red tape” by cutting regulatory requirements for ESS “where employers do not charge or lend to the employees to whom they offer ESS”.

“This measure will help Australian companies to engage and retain the talent they need to compete on a global stage, which is consistent with recommendations from the Global Business and Talent Attraction Taskforce,” the Budget states.

“This measure is estimated to decrease receipts by $550.0 million over the forward estimates period. At maturity, which occurs in the medium term, the proposal is expected to have a negligible impact on receipts as the costs of the proposal are expected to be offset by the collection of previous deferrals.”