Will Rudd tax ruin your bonus?

Just when you thought that shares, rather than cash, were a more politically correct and risk-adverse way of paying bonuses, the Government is cracking down on them too.

Bucking an international trend of encouraging equities as a way to link bonuses to long-term performance, the 09/10 Australian budget contains plans to tax shares or options upfront when they are granted, rather than when they vest or are sold.

Prompted by concerns that some executives are deferring their tax payments indefinitely, the change is expected to add about $200m to Canberra's coffers over the next four years.

The proposal – which the Government is now reviewing because of intense union and employer opposition – has caught the financial services industry off guard and is forcing some firms to reassess their exec remuneration policies.

AMP chairman Peter Mason describes the decision as a ìsurpriseî that will cause companies, including his own, to review their pay strategies.

As reported on eFinancialCareers in April, Macquarie had planned to reduce the cash competent of its bonus scheme and move about 300 senior staff to longer-held, performance-driven equity arrangements. It was hoped this would better regulate risk-taking behaviour, aid employee retention and fend off public criticism of bankersí bonuses.

Macquarie is now examining the Governmentís tax plans and might have to amend its bonus strategy, which was expected to take effect after its annual shareholders meeting in July.

Employment experts say itís too soon to predict how banks will react to the tax shock.

ìOf course most people prefer to be paid in cash, but the cash component is getting smaller. Now it seems equities are getting hit too. This potentially defeats the object of trying to pay bonuses in shares,î Al Ritchie, director of Ritchie and Associates Recruitment, tells eFinancialCareers.com.au.

And although bonuses are less important than base in the current climate, this tax tinkering could hit you in the pocket when markets pick up. ìWith bonuses falling at the moment, itís a softer blow for now, but it could hurt more in two or three years,î adds Ritchie.

The Australian Bankers Association wants the tax changes to be discussed within wider reviews of remuneration being undertaken by the Australian Prudential Regulation Authority and the Productivity Commission.

ìI want to know what the objective is here, so let's make sure this doesn't cut across the work being done by APRA and the Productivity Commission,î ABA chief executive David Bell told the media earlier this week.