Recent headlines have suggested this year’s Federal Budget has something for everyone in it, so what does it have in it for executives?
Amongst the good news is recognition that some of the particularly onerous rules relating to Executive Share Schemes have been noted with the taxing point for those who leave employment under the ‘good leavers’ provision slated for removal. There are also changes to Tax Residency Rules and an unexpected opportunity for cashed-up executives who might be thinking about helping their adult children into the property market.
Executive Share Schemes (ESS)
The Budget proposes the removal of the taxing point at the time of ceasing employment, which I believe will provide a greater level of certainty along with reducing complexity for ESS participants.
Under current ESS rules, there is considerable complexity and uncertainty for executives commonly referred to as “good leavers”, otherwise known as executives who are allowed to keep their ESS entitlements even after their employment ceases.
Currently where ESS interests are being assessed under the deferred taxation method, a taxing point occurs when the executive ceases employment with the ESS provider. That is, all of the deferred taxes on the ESS interests the executive has been allowed to retain post-employment, are crystallised at the time their employment ceases. Executives are required to amend prior year tax returns to include ESS income amounts once they become known. This can occur years after they cease employment and often results in substantial unplanned tax costs.
These rules can become even more difficult when there is a performance aspect included in the ESS vesting conditions. Other complexities relate to uncertainty as to when, if or how many ESS interests will vest, or if there is an uncertain value connected to the ESS interest.
I’m sure you agree, this Budget proposal, along with any others designed to make ESS less complicated, is very welcome.
SMSF, Tax & going Overseas
For executives with SMSFs, extraordinarily high taxes usually apply to them when you take up an overseas secondment. This is due to a penalty tax regime that applies to executives who are deemed to have become non-residents of Australia. The usual course of action to avoid tax is to close down the SMSF prior to departure.
In more good news, this year’s Budget significantly reduces the tax exposure for SMSFs which will remove both the very high tax payable and the added cost and complication of closing down the SMSF prior to taking up temporary secondments overseas.
New 183-day Tax Residency Rule
This Budget also acknowledges our largely out-dated tax residency laws. Thanks to a new primary rule, an individual will be considered an Australian tax resident if, in any income year, they are physically present in Australia for a minimum of 183 days.
‘Work Test’ removal for older executives
Let’s face it, career executives may not be ready to retire just because their age dictates it.
In another welcome Budget proposal, the Work Test for Australians aged 67 to 74 will be repealed. This will allow executives in this age category who wish to work on (for at least 40 hours in a 30-day period prior to making contributions) to be able to make salary sacrifice and non-concessional contributions to their super. Effective 1 July, 2022.
You + Surplus Cash = Adult kids in their own home
The First Home Super Saver Scheme will potentially allow your kids to withdraw up to $50,000 from their super account (an increase from $30,000) to put toward purchasing their own home.
If you’re a cashed up executive with adult kids whom you’d like to leverage into their own homes (possibly to launch them out of yours!) this is also a welcome opportunity.
Under the First Home Super Saver Scheme you may be able to contribute to your adult children’s super fund balances. In some circumstances, it may be possible to arrange this in a way that also reduces your effective tax rate. Any earnings on the savings will be assessed at the concessional superannuation fund rate of 15%, a considerable benefit when compared to higher tax rates that apply outside of super.
Meantime…
It appears the proposed Super Guarantee increase to 10% from 1 July, 2021 will go ahead along with other proposed super changes. These include increasing concessional contribution caps to $27,500 pa and non-concessional caps to $110,000 pa. Bring forward rules will increase to $330,000, while for older executives looking to retire in coming years, the Transfer Balance Cap will increase from $1.6m to $1.7m providing an additional $100,000 that can be transferred tax-free into your pension phase.
For further information and specialised advice relating to tax and business matters, please contact Craig Barry on +61 (0) 7 3007 2080 or mail contact@executivestrategies.com.au
Executive Strategies is a specialised information hub for executives and senior managers, those have founded their own business or who work for growing private, ASX listed companies or government businesses. Its purpose is to provide access to specialist advisers and information that address the often-complex issues affecting personal prosperity.
