The 'lucky country' or the stupid country?
In our 'lucky country', which critically depends on the health of its greatest fiscal contributor, the resources industry, directors of resources companies (and others) are put in a terrible position by the tax laws. Based on my experience, the system works like this. It's worse than no good, and is basically caused by harsh tax laws. It's a strong discouragement to being a director and that's a Fail for the country's ongoing need to find people for its most important sector. Check this out…
Deemed income (even though not received) creates tax liability and cash flow problem
Directors who receive share rights (so the company has to pay out less cash as salary, and so they are incentivised to perform and have aligned interest with other shareholders etc.) are deemed to have earned income from the attributed value of the rights, even though they have not sold or otherwise monetisedthem.
These particular Directors were awarded share rights that vested after certain conditions were met. With the rights vested and the shares out of escrow, I believe the Directors then became liable for tax on the attributed value, even if they had still held them. Doesn't matter that they would have had no cashflow from a sale – just pay tax anyway because of deemed income for this financial year. Oh great ….
As an example, by my calculations for two of the Directors, they would have had tax bills of slightly over $100k to pay on their rights. That accords with Caspin's statement that the amount of shares sold was to realise tax obligations.
Non-executive directors often get paid peanuts in cash
Where else might the money coming from then? Who said director's fees? Caspin's Non-Execs. (as these all are) get $45k p.a., other than the Chairman who gets $60k p.a. That's gross income, so assuming they are on the top tax rate that would net them roughly ~$24k p.a. or ~$2k per month, or in the case of the Chairman ~$32k or ~$2.6k per month. For the responsibility of steering a listed public company…
So if the two Directors that I considered had saved every $ from what they earned after tax from Caspin during the year and applied it to their deemed tax liability they would still be say $80k short. That's real money and it's a liability that isn't going away. We can't expect people to do a job for a year for ~$24k after tax and to then stump up a serious amount of money – from where?? - to pay tax on rights/shares that have not been sold. Most of us work to make a buck so we can do things like buy a house, raise a family or whatever, buy a car, take a holiday, pay bills etc. i.e. to just live …
Hit the right target
Two main problems I see:
1. No-one likes it when people (especially Directors) Sell shares in one of our companies. However, there's no point owning shares if you can't sell them, and sometimes you sell them because you're put in a tight spot. This looks like such a case. Not great for the rest of us but so be it. I don't blame them in the circumstances. They're the wrong target – the sights should be aimed at the tax laws.
We also can be grateful that apparently they had a buyer for all the stock so they did not 'hit the bid' on market. I noticed the transaction at the time. Phew.
2. It's a shame that our tax system acts as a disincentive to companies using even milestone-based share rights to reduce cash out, and to incentivise people. Unfortunately, I don't hear lobbyists raising trendy words like 'fairness' and 'equity' in this context. Nor will you hear politicians calling for an inquiry into the problem. Perhaps they're busy counting end of year balances in their taxpayer (there's that word again…) funded super schemes.
(20min delay)