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Legislative and common law frameworks – further challenges affecting Australian family companies
The Corporations Act 2001 and the Income Tax Assessment Act
1997 impose certain rules on the allocation of shares within a company.
Family businesses trading under a company structure raised concerns about
various rules affecting share allocation.
This chapter considers three challenges raised by family businesses. First,
submitters argued that the restriction in section 113 of the Corporations
Act 2001 on the number of shareholders in a proprietary company undermines
the effective administration of a family business. Second, submitters also
questioned the rules regarding employee share schemes in Division 83A of the Income
Tax Assessment Act 1997. Third, it was noted that family
values may not easily align with more traditional concepts of corporate values.
Accordingly, it was submitted that this can affect family companies' approach
to engaging with corporate management structures such as boards of directors.
Section 113 of the Corporations Act 2001
As part of its 2008 report for its inquiry into 'the engagement and
participation of shareholders in the corporate governance of companies in which
they are part owners' (the 2008 shareholder inquiry),
the committee recommended that 'the government should amend section 113 of the
Corporations Act to raise the limit for shareholders in a proprietary company
The committee's recommendation responded to concerns that the corporate governance
requirements under the Corporations Act may impede small, closely held,
entities from incorporating. As the committee noted in its report:
[t]he thrust of this disquiet is that the one size fits all
approach best suited to regulating large financial entities is not necessarily
suitable for small businesses without a diverse group of equity investors to
Section 113 of the Corporations Act limits the number of non-employee
shareholders in proprietary companies. A company with in excess of 50
non-employee shareholders is by virtue of section 113 required to incorporate. As
the committee noted in its 2008 report, evidence before the committee included
representations of Family Business Australia that family companies in existence
for successive generations could inadvertently exceed this limit and,
accordingly, be required to incorporate.
Family Business Australia advised that to avoid the automatic reconstitution of
the business from a proprietary company to a public company, family businesses
adopt inefficient governance practices. These practices can include minimum
shareholding limits, joint share ownership and beneficial ownership, and 'no
dividend' or 'low dividend' policies. Family Business Australia further advised
that such arrangements can lead to family conflict and reduce the company's
access to finance. For the 2005 shareholder inquiry, Family Business Australia
concluded that section 113 leads to 'shareholder oppression: oppression by
Similar concerns were raised by family business representatives during
the committee's current inquiry. Family Business Australia reiterated its
concerns with the effect of section 113, outlining two objections with the
non-employee shareholder limit. First, Family Business Australia challenged the
policy basis for the 50 non-employee shareholder cap:
It is understood that the '50 shareholder rule'...is intended
to protect the interests of those 'passive' shareholders. It not only
unnecessarily duplicates other forms of legislative protection provided to such
stakeholders, but represents a simplistic approach to that objective which adds
considerable cost with, in most cases, little or no benefit to those it is
designed to protect.
MGI Australasia concurred with this view, also challenging the policy
basis for the non-employee shareholder cap:
We also agree with the observation of Family Business
Australia that this legislation is unnecessary in that there are adequate remedies
already available elsewhere in corporate laws to protect minority shareholders.
It is our observation that the current law is able to be easily circumvented by
those firms that do not wish to be burdened by the cost of a public company and
therefore the provision has little practical use.
Second, the committee was again advised that the 50 non-employee
shareholder limit compromises the governance practices of an 'increasing
number' of family businesses:
FBA reiterates its objection to this provision, in respect of
which anecdotal evidence indicates that increasing numbers of family businesses
which are aware of the consequences of ownership by more than 50 shareholders
adopt a range of shareholding arrangements to keep the share register below 50
non–employed owners. Examples of such strategies include: minimum shareholding
limits and otherwise independent shareholdings being held jointly under various
ownership, or beneficial ownership structures.
As the statement indicates, the committee was informed that the 50
non–employee shareholder limit adversely affects a significant proportion of
the family business sector. Family Business Australia put forward that it 'is
an issue that most larger family businesses would concur with'.
MGI Australasia noted that approximately 11 per cent of family businesses reach
the third or subsequent generations, a figure which it was submitted is
While not estimating the proportion of family businesses affected, Mr William Noye,
National Leader, Family Business Services, KPMG, provided the example of
Coopers Brewery which has approximately '183 shareholders in [the] family
In support of expanding the 50 non-employee shareholder limit, Mr Noye
submitted that '[i]t is important to be able to cater for broader family
The theme of supporting successful multigenerational family businesses
was commonly put forward as a key reason for amending section 113. MGI
Australasia noted that '[a]s family businesses progress through the generations
the number of shareholders not employed in the business grows.'
MGI Australasia implied that section 113 operates to penalise highly successful
Such businesses, by virtue of their longevity, are often the
larger family enterprises. It is such businesses that are often caught by the
so-called 50 shareholder rule...section 113 of the Corporations Act 2001...requires
corporations with more than 50 non-employed members to become unlisted public
companies. This places unnecessary administrative costs on such enterprises.
Similarly, the Institute of Chartered Accountants Australia submitted:
[l]arger and older family businesses may have more than 50
non–employed members and the requirement for these businesses to restructure as
unlisted public companies imposes administrative costs for questionable
The 50 shareholder restriction in section 113 of the Corporations Act
was not broadly raised by family business owners. However, where raised, the
submissions of family business representatives reflected family business owners'
concerns. Mr Stephen Sampson, Director, Lionel Sampson Sadleirs
Group, supported an increase to the 50 non–employee shareholder cap. Mr Sampson
advised that enacting the committee's 2008 recommendation 'would be incredibly
helpful' as it would assist family businesses to respond to governance
Mr Graham Henderson, Director, Family Business Australia, and managing director
of a 63-year-old third-generation family business, supported the increase of
the 50 non-employee shareholder limit, stating that 'small or medium
businesses–SMEs–certainly need more than 50 shareholders.'
The government's response to the
committee's 2008 report
The government has not provided a formal response to the committee's
2008 report. Rather, on 6 July 2011, the government advised the Speaker of the
House of Representatives that '[t]he government does not intend to respond to
the report because of the time elapsed since the report was tabled'.
During the 2008 shareholder inquiry, Treasury advised that companies
with more than 50 shareholders have a sufficiently diverse ownership base to
justify the greater governance requirements that apply where companies
incorporate. It was further noted that large proprietary companies have similar
reporting obligations to listed public companies. As Treasury submitted:
[t]he regulatory regime established for proprietary companies
is based on the principle that these companies have a relatively non-disperse
shareholder base. For this reason, the Corporations Act requires proprietary
companies to have less than 50 non-employee shareholders. Companies with a
wider shareholder base, for example listed or other public companies, face
greater issues in providing effective oversight and control of company
management. In order to address these issues, the Corporations Act places
greater governance requirements on companies with more disperse ownership.
Accordingly, Treasury did not accept that there was a compelling
rationale for amending section 113.
It was further noted that few stakeholders have raised concerns with its
operation and effect:
The requirement for proprietary companies to have no more
than 50 non-employee shareholders existed when Australia first adopted a
national regime for corporate regulation in 1982. Since this time, Treasury has
received very few comments from stakeholders in relation to this requirement.
The requirement was reviewed as part of the Corporations Law Simplification Program
in 1994. This included stakeholder consultation on whether there should be a
restriction of the number of non-employee shareholders in proprietary
companies, and if so, what should be set as the maximum number. Following this
review, a decision was made not to amend the existing requirement.
Five years on, in evidence submitted for the committee's family business
inquiry, Treasury affirmed the advice previously given during the committee's 2008
shareholder inquiry. The committee was advised that 'the views that were
expressed at the time...are consistent with the views which we would hold today
on the issue'.
Treasury confirmed that the increased reporting obligations on companies
with a diverse stakeholder base are intended to protect the integrity of
Australia's financial system:
The principle behind the limit goes to the heart of how the Corporations
Act seeks to address the agency issue which can arise when control of the
company is exercised on a day-to-day basis as distinct from by specialist
management and as distinct from the owners of the company. The Corporations Act
has developed a framework to address that...mainly through imposing levels of
disclosure upon the company. Those levels of disclosure vary between
proprietary companies and public companies– listed and unlisted. Section 113
limits at 50 non–employee shareholders, and the principle behind that is that
the more diffuse and the greater the number of shareholders on the registry,
the greater is the potential for the agency problems to arise.
Further, Treasury officials reiterated that the reporting obligations
applying to larger proprietary companies are similar to incorporated companies.
Although it acknowledged that the 50 shareholder limit is 'an arbitrary line in
the sand', Treasury maintained its previous advice that the Department had
'received very few representations from small businesses and family businesses'
about the effect of section 113. Accordingly, it was submitted that 'it is
not clear how great the benefits would be of raising the cap'.
Importantly, however, Treasury advised the committee that '[i]f there was a
problem, and people came to talk to us, we would be happy to revisit the
In electing to inquire into the operation of the family business sector
in Australia, the committee determined to establish whether Australia's marketplace
appropriately accommodates family businesses. Evidence before the committee
demonstrates that section 113 of the Corporations Act is an example of a
general corporations law policy that does not correlate with the specific needs
and operational realities of family businesses. The effect of section 113 for larger,
multigenerational family business further demonstrates the need for government,
and policymakers more broadly, to proactively engage with the family business
The committee acknowledges Treasury's advice that the limit on non-employee
shareholders imposed by section 113 is an integrity measure. However, in the
context of family businesses, the committee questions the relevance of Treasury's
advice that the more diffuse and the greater the number of shareholders on the
registry, the greater is the potential for the agency problems to arise. Where
the non-employee shareholders are members of the same family, supporting the
same business objectives, it is not clear that these agency problems will be
The committee appreciates Treasury's advice that the Department has
received few representations about the effect of section 113 on family
businesses, or, indeed, small businesses. However, the evidence currently before
the committee mirrors that which the committee obtained about section 113
during its 2008 shareholder inquiry. The time has come for government to
consider whether the policy rationale behind section 113 is applicable in the
family business context.
A theme that has emerged throughout this inquiry is the need for the
family business sector to assume a more active presence in policy and
legislative development. The committee encourages family business
representatives to collectively approach government to provide necessary advice
about the sector, its operational successes and its needs going forward.
To this end, the committee recommends that Treasury officials meet with
representatives of the family business sector to explore the effect of section
113, and whether the policy rationale for the 50 shareholder limit is
applicable for family businesses. The government's response to this report
should detail the consultation process, the issues raised, and the measures
that the government proposes to actively support larger, multigenerational
family businesses to respond to the non-employee shareholder limit. It is
incumbent on family businesses to advise Treasury of the number of family
businesses that have exceeded, or are actively taking steps to avoid exceeding,
the 50 shareholder limit.
The committee recommends that the Department of the Treasury consult
with representatives of the family business sector about the effect of
section 113 of the Corporations Act 2001 on large, multigenerational
The committee considers that it would be appropriate for the Australian
Bureau of Statistics to collect data on the effect of section 113 on Australian
businesses, including family businesses.
The committee recommends that the Australian Bureau of Statistics
collect data on the effect of section 113 of the Corporations Act 2001 on
Division 83A of the Income Tax Assessment Act 1997
Family business advisors MGI Australasia and the Institute of Chartered
Accountants Australia argued that the rules in Division 83A of the Income
Tax Assessment Act 1997 (the 1997 Act) that regulate employee share schemes
disadvantage small and medium sized family businesses trading under a company
Employee share schemes provide employees shares, or the opportunity to
acquire shares, in the company for which they work.
The Australian Taxation Office (the ATO) defines employee share schemes as:
a scheme under which shares, stapled securities and rights
(including options) to acquire shares or securities in the company are provided
to its employees (including current, past or prospective employees and their
associates) in relation to their employment.
Employees' entitlements under employee share schemes are taken into
account by the ATO for tax purposes. Division 83A of the 1997 Act establishes
the rules that determine the taxation arrangements for employees' entitlements
under employee share schemes. Division 83A was inserted in 2009 by the Tax
Laws Amendment (2009 Budget Measures No. 2) Act 2009, which received Royal
Assent on 14 December 2009. Division 83A replaced Division 13A of the Income
Tax Assessment Act 1936 (the 1936 Act), which was introduced in 1974. The
rules in Division 83A were intended to address concerns that Division 13A of
the 1936 Act was open to misuse and did not effectively prevent tax avoidance.
As Treasury informed the committee, the 2009 changes to the regulation of
employee share schemes:
were designed to better target eligibility for the
concessions to employees to improve fairness and the integrity of the tax
system. The changes improve horizontal equity in the tax system by treating
different forms of remuneration more equally.
As noted in the Explanatory Memorandum (EM) to the Tax Laws Amendment
(2009 Budget Measures No. 2) Bill 2009, the taxation arrangements established
in Division 83A are intended to strike an appropriate balance between ensuring
that all remuneration received, regardless of its form, is subject to taxation,
and encouraging business productivity and the retention of appropriately
[T]he employee share scheme tax rules...specifically aim to
improve the alignment of employee and employer interests. In recognition of the
economic benefits derived from employee share scheme arrangements, the rules
provide tax concessions for employees participating in employee share schemes. Tax
support is provided on the grounds that aligning the interests of employees and
employers, encourages positive working relationships, boosts productivity
through greater employee involvement in the business, reduces staff turnover
and encourages good corporate governance.
This intention is given legislative force by section 83A.5 of the 1997
Act, which provides that the objects of Division 83A are:
- to ensure that benefits provided to employees under employee
share schemes are subject to income tax at the employees' marginal rates under
income tax law (instead of being subject to fringe benefits tax law); and
- to increase the extent to which the interests of employees are
aligned with those of their employers, by providing a tax concession to
encourage lower and middle income earners to acquire shares under such schemes.
Accordingly, Division 83A establishes four categories of employee share
- taxed-upfront scheme – not eligible for reduction (default tax
- taxed-upfront scheme – eligible for reduction;
- tax-deferred scheme – salary sacrifice; and
- tax-deferred scheme – real risk of forfeiture.
The Institute of Chartered Accountants Australia provided the following
explanation of the tax concessions available under Division 83A:
Division 83A of ITAA97 operates to tax employees upfront on
the value of any discount they are allowed on the provision of shares. This tax
may only be deferred if the arrangement is structured so that:
- there is a real risk that the shares will be forfeited, or
- the shares are acquired under a salary sacrifice arrangement and
the employee receives no more than $5,000 worth of shares per annum.
The Institute further explained that Division 83A defers but does not
waive tax liabilities:
The tax will be deferred until the earliest of:
- the time when there is no real risk that the employee will
forfeit the shares and there are no genuine restrictions preventing disposal;
- when the employee ceases the employment; or
- seven years after the employee acquired the shares.
To access the concessions in Division 83A, employee share schemes must satisfy
a number of preconditions. These include that the employee share scheme is
non-discriminatory. A scheme satisfies this requirement if shares are offered
to at least 75 per cent of the company's employees.
This requirement was carried over from the rules under the former Division 13A
of the 1936 Act.
As Treasury explained, the 75 per cent rule does not apply to
employee share schemes that only offer rights, that is, options, in the
Additionally, an employee may not hold more than five per cent of the company's
shares, or be in a position to cast, or to control the casting of, more than
five per cent of the maximum number of votes that might be cast at the
company's general meetings.
As the Board of Taxation has commented, the requirements:
aim to ensure, among other things, that participation in the
scheme is widely available to employees, and that the concessions cannot be
accessed by shareholders who are effectively able to exert control over the
Employee share schemes and
The Institute of Chartered Accountants Australia argued that for private
family companies employee share schemes are primarily used to promote company
loyalty, rather than to increase remuneration provided to executive employees:
Providing shares to an employee in an SME is usually seen
more as a means of aligning the long-term goals of the business with those of
the employee rather than being a component of a remuneration package.
However, employee share schemes are considered an essential recruitment tool
for family businesses seeking to attract senior management personnel.
The Institute of Chartered Accountants Australia submitted that the judicious
use of employee share schemes 'is about giving employees and employers in the
family business the best opportunity they have...to ensure that the business can
survive into the future.'
However, the committee was advised that it is difficult for family
companies and their employees to access the tax concessions under Division 83A.
It was submitted that the requirements to access the tax concessions do not
reflect the structure and financial arrangements of family companies. In
particular, concerns were raised with the rules in Division 83A that require
employee share schemes to be available to a broad range of employees. The
Institute of Chartered Accountants Australia submitted that the requirement for
employee share schemes to be non-discriminatory is at odds with the strategic
use of employee shares to attract senior management personnel:
Importantly deferral is only available where at least 75% of
all of the permanent employees of the employer who have completed at least 3
years service are entitled to acquire shares.
This requirement that the shares are broadly available
effectively means that deferral is not available where shares are offered only
to key employees, which will generally be the position where shares are
provided to one or a few managers for succession planning purposes.
MGI Australasia concurred with this view, arguing that Division 83A
limits the opportunities available to family businesses to attract external
According to the 2010 MGI survey around one third of family
business owners believe that the current CEO is likely to be succeeded by a non-family
member. The attraction and retention of suitably skilled outside managers is
therefore key to the success of that transition.
Attracting and retaining skilled and experienced successors
is a critical component in the transitioning of family businesses from the
current baby boomer owner-operators. Providing attractively-priced equity in
order to achieve this is currently discouraged by Division 83A.
To this end, the Institute of Chartered Accountants Australia
recommended that Division 83A be amended to 'exempt SMEs from the broad
availability requirements'. It was submitted that SMEs should be defined as 'businesses
which characteristically have insufficient depth of management to ensure
long-term viability of the business' and 'with an aggregated group turnover of
no more than $35 million per annum.'
Treasury disputed the view that employee share schemes should be
targeted towards executive management positions. Treasury argued that employee
share schemes are not an appropriate means of fostering company loyalty:
The interests of senior executives and directors of
companies, including those working for family businesses, should already be
strongly aligned with the interests of shareholders and therefore there is no
productivity benefit that would arise by extending additional tax concessions
to shares issued at a discount to such persons.
Additionally, it was noted that providing employee share schemes to only
a select proportion of employees would create disparity within the company. As
Treasury submitted,'[a]llowing executives to defer the taxation point would
provide a concession to a select group that was not extended to the majority of
Further, Treasury questioned the integrity of offering employee share schemes
to only employees in senior management positions. Treasury advised that 'the 75
per cent requirement ensures the ESS [employee share scheme] tax concessions
are not inappropriately accessed by those in control of the company.'
In response to proposals to exempt a particular class of business from
the 75 per cent requirement, Treasury informed the committee that 'it
would be difficult to define "family business" to provide an
exemption from the 75 per cent requirement, in a way that would robustly ring-fence
particular types of companies.' It was further contended that the isolation of
a particular category of Australian business in the manner recommended by
family business representatives 'could also compromise the integrity of the ESS
[employee share scheme] tax regime as a whole, potentially creating situations
of inequity and increasing risk of tax avoidance'.
The issue of whether employee share schemes can appropriately be used as
a form of executive remuneration was the subject of previous inquiry. In 2009,
the Productivity Commission examined 'the current Australian regulatory
framework around remuneration of directors and executives, as it applies to
companies which are disclosing entities regulated under the Corporations Act
As the Productivity Commission noted, the 2009 amendments to the
regulatory framework for employee share schemes restricted executive employees'
access to the tax concessions.
Prior to 2009, the tax concessions applying to employee share schemes could be
accessed by all employees regardless of their salary. In contrast,
Division 83A limits the tax concession to taxpayers with an adjusted
taxable income of less than $180 000.
The EM to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009
indicates the policy reasons for the introduction of a ceiling on the salary
levels of eligible employees. As stated in the EM, the tax concessions under
Division 83A are intended to be available only to lower and middle income
Executives appear to be outside the contemplated scope of the tax concessions
under Division 83A. As the Productivity Commission noted:
[t]he taxation provisions for employee share schemes are not
specifically designed for executives and must apply to all Australian employees.
Furthermore, the concessions that enable deferral of tax for equity-based
payments are targeted towards schemes to encourage broad employee share
The Productivity Commission did not recommend that the $180 000
salary limit be increased. However, the Productivity Commission did recommend
that the 2009 changes to the regulation of employee share schemes be reviewed
as part of a broader review into corporate governance arrangements. The
Productivity Commission further recommended that the review be undertaken no
later than five years from the introduction of any new measures arising out of
the Productivity Commission's report.
Suitability of Division 83A for
family companies – liquidity requirements
Family business advisors further submitted that Division 83A effectively
discriminates between public companies and private family companies. MGI Australasia
advised that '[f]amily businesses are at a great disadvantage competing with
large enterprises, which offer discounted equity that can be market traded
and/or structured to gain tax deferral.'
It was noted that, compared with public companies, shares in a private
company are not liquid.
Accordingly, tax is levied on benefits that cannot easily be realised. The
Institute of Chartered Accountants Australia argued:
[t]his acts as a deterrent to family businesses providing
discounted equity to successors, because it results in tax on a 'benefit' that
may take decades to convert into cash. Unlike shares in a public company,
shares and family business are highly illiquid.
It was submitted that it is necessary for employees of private family
companies to access the tax concessions under Division 83A. As the Institute of
Chartered Accountants stated:
Because of this lack of liquidity, paying full value for
equity in an SME is not attractive to employees who have no certainty as to
when, or if, they will be able to realise that value or indeed any value. It is
therefore often both desired and necessary for SME owners to gift or discount
equity to key managers. However the taxation impediments to this often mean that
equity is not provided or is provided through complex, cumbersome arrangements
in order not to fall foul of the current taxation provisions.
Treasury disputed the view that legislative amendment is necessary to
support family businesses to access tax concessions under Division 83A. In
response to liquidity concerns raised by submitters, Treasury advised that
liquidity 'is an issue that is not unique to family businesses and is faced by
many other companies (for example smaller listed companies).'
Treasury also reiterated the accepted taxation principle that '[t]he economic
value embodied in employee share schemes and rights is equivalent to any other
form of employee compensation and should generally be taxed in the same
The argument that access to tax concessions under Division 83A is
necessary to support 'cash-strapped' companies was considered in 2009 by the Board
The Board acknowledged that there is some merit to the argument. However, the
Board ultimately concluded that relaxing the current restrictions was unviable:
The Board agrees that there is some merit to the argument
that the existing restrictions that operate to limit access to the existing
employee share scheme tax concessions tend to operate particularly onerously on
these types of companies.
However, the Board considers that due to the largely
disparate nature of these types of companies there is a fundamental difficulty
in attempting to define which entities should be eligible to access any relaxed
restrictions. The Board considers that in light of the significant integrity
concerns to the operation of the employee share scheme provisions created by the
inability to adequately ring-fence eligibility, any relaxation of the current
restrictions is not a viable alternative.
Additional matters: The five per
cent cap on the percentage of company shares held and the maximum seven year
Concern was also raised with the restriction on the percentage of
company shares that an employee may hold in order to be eligible to access tax
concessions under Division 83A. The Institute of Chartered Accountants
Australia submitted that the five per cent limit is 'too low to provide a
worthwhile succession planning mechanism'.
It was argued that a 'minority holding' test would be more appropriate for
[A] more meaningful requirement would be for the shareholding
to be a minority holding. Once majority holding is obtained, the succession has
essentially taken place and the employee is then in a better position to be
able to realise the value of the shares.
However, it is evident that there is a disconnect between the policy
intent underlying Division 83A and the use of employee share schemes by
companies within the family business sector. As noted in the EM to the Tax Laws
Amendment (2009 Budget Measures No. 2) Bill 2009, the five per cent requirement
reflects the policy of aligning employee interests with company interests. As
the EM notes, it was not considered necessary to provide tax incentives to align
the company's interests with the interests of employees who hold more than five
per cent of the company's shares:
This provision encourages the benefits of the employee share scheme
to be spread widely among employees. The concession is intended to encourage
employees with small or no ownership in their employer to take up an interest
in the company. It is considered that if one employee owns more than 5 per cent
of the voting rights, interests between the company and that shareholder are
already aligned, and no tax concession is appropriate or warranted.
The EM casts further doubt on the appropriateness of using employee
shares as a mechanism to facilitate change of company ownership:
Further, this acts as an integrity rule that prevents
taxpayers from misapplying the concession in order to buy a business or
indirectly access company profits through the employee share scheme rules. The concession
is intended to apply in respect of the employee/employer relationship and not
in relation to the company/shareholder relationship.
It was further submitted that 'the maximum deferral period of seven
years contained in Division 83A should be extended for SMEs, as generally the
opportunity to realise shares in an SME is extremely limited'. The Institute of
Chartered Accountants put forward that the deferral period for SMEs, including
relevant family companies, should be 'extended to the earlier of a realisation
event, termination of employment...and obtaining a majority shareholding.'
Prior to 2009, Division 13A of the 1936 Act authorised tax liabilities incurred
under employee share schemes to be deferred for a maximum of 10 years. With the
introduction of the 2009 amendments, this timeframe was reduced to seven years.
Concerns with the introduction of a seven year maximum deferral period were
raised at the time of consultation on the exposure draft legislation.
In response, the EM to the Tax Laws Amendment (2009 Budget Measures No. 2) Bill
The deferral period is limited by the ESS deferred taxing
points to ensure fairness, [to] continue to align the interests of the employer
and employee, and [to] preserve the integrity of the tax system by preventing unlimited
deferral of tax on employment remuneration.
While some submitters to the Exposure Draft consultation process raised
concerns with the reduction of the maximum deferral period, others accepted the
reduction as a revenue raisings measure.
The seven year deferral period is not included in Treasury's summary of the key
matters raised during the consultation process.
On the basis of evidence before the committee, it is clear that there is
tension between the preferred use of employee share schemes by family companies
and the policy rationale underpinning Division 83A. In authorising the
enactment of the Division 83A framework, Parliament intended to foster the
productivity benefits that can be gained where employees have a personal stake
in the success and profitability of their employer. Division 83A was not
intended to facilitate management handovers or ownership transfers. Indeed,
utilising Division 83A for these purposes attempts to re-engineer the operation
and purpose of employee share schemes and the Division 83A tax
The committee notes the Productivity Commission's recommendation that
the operation of Division 83A be reviewed. The committee also notes that the
Board of Taxation's inquiry into the effect of Division 83A on 'cash-strapped'
companies did not expressly include family businesses. Therefore, the committee
considers that as part of a broader process of actively engaging with the
family business sector, Treasury should review the challenges encountered by
family businesses in recruiting executives and advise the government about
whether the employee share scheme framework should be adjusted to support
family businesses in their recruitment endeavours.
The committee recommends that the Department of the Treasury review the
evidence gathered through the committee's inquiry into the family business
sector in Australia and consider consulting the stakeholders identified through
this inquiry about the sector's concerns about the effect of Division 83A of
the Income Tax Assessment Act 1997 on their capacity to engage suitably
qualified executives. Treasury should advise government about whether
appropriate support can be provided, whether through amendments to Division 83A
or other mechanisms, to address the challenges faced.
Family businesses, directors and
The committee was informed that family values can affect a family
business' management structure and financial operations. As David Hill,
National Managing Director of Deloitte Private, noted, family values may not
reflect corporate values:
Corporates often are challenged by taking decisions based on
quarterly reporting cycles—very short-term decisions designed to...report a
profit. Family businesses do not think that way; they think of the longer term
because of their legacy, their values and their reputation.
For family businesses trading under a corporate structure, family values
can impact corporate practice. Notably, the committee's attention was drawn to
the composition and use of boards of directors.
As MGI Australasia has advised, formal boards assist companies to
increase accountability, improve decisions making and planning without
However, family businesses have shown a reluctance to engage more than the
statutory minimum number of directors. MGI explained that the lack of formal
boards is a result of family businesses' reluctance to engage more than the
minimum amount of directors in order to maintain a certain level of asset
protection and to minimise the liability of the family business.
As a solution, MGI Australasia Ltd recommended in their submission that
a separate class of directors should be created to encourage the adoption of
separate formal boards. This sub class of director would not be subject to the
liabilities that a standard director would be exposed to:
[A]dditional persons should be able to act as actual or
defacto directors without being subject to all the personal risks applied under
the Corporations Law...as long as at least one member of the family business
remains fully liable.
The submission suggested that this new category of a director could be
named an 'associate director'.
Reports into this issue have offered other reasons for family businesses
only engaging the minimum amount of directors, separate to asset protection and
the reduction in risk of liabilities. The MGI Australian Family and Private
Business Survey 2010 stated that 'the main reasons provided for the lack of
non-family, non-executive directors on the Board were: desire to retain privacy
52.5%...and skills required at Board level exist in-house 29.0%'.
Deloitte Private recommended a different approach to solve this
issue—the creation of an advisory board. An advisory board would consist of a
panel of external advisors who would aid directors. The advisors would not be
considered directors, as they would not be entitled to vote on directors'
resolutions, they would not receive directors' fees and they would hold only an
advisory function. This would absolve the board of advisors of any liability.
The duties of directors set out in the Corporations Act reflect the
necessity of protecting investors. 
It is expected that directors will uphold the highest of standards in the
interests of investors and act with the degree of care and diligence that a
reasonable person would exercise in their position.
The same standards apply for a director of a family business. In addition, a
director owes fiduciary duties to their company. The director cannot have a
conflict of interest and must act in the interest of the company.
After the Centro civil penalty case, the Australian Securities and Investments
Commission (ASIC) explained that 'the role of a director is significant as
their actions may have a profound effect on the community'.
Accordingly, ASIC has also previously warned against directors heeding the
advice of others without question.
As ASIC has recognised, directors are seen as the 'gatekeepers' of the
Australian markets. 
A director's duty is to act in the interest of the company, regardless of
whether it is a public or family business. The committee notes that directors
can be useful to family businesses in non-traditional ways, such as resolving
family business conflicts.
Though family businesses will only tend to engage the minimum number of
directors, those directors are responsible for ensuring the company functions
in compliance with the Corporations Act.
The committee believes there is no policy justification for the
recommended change to add associate directors to the Corporations Act. A change
such as the inclusion of associate directors could have unintended consequences
in the broader Corporations Act, radically changing its framework while
potentially affecting the general quality of directors' duties.
The suggestion for an advisory board for family business raises concerns
for the committee. There is an inherent danger in directors relying
uncritically on advisors, as the actions directors take can have a significant
impact on shareholders, employees and the wider community. This danger was made
evident by the Federal Court of Australia's decision in the Centro civil
The committee notes the hesitance of family businesses to engage more
than the minimum number of directors. However, this uncertainty seems to be born
of a discord between corporate and family values and a perceived need to keep
the majority of the family business' decisions within the family, rather than a
desire to maintain a certain level of asset protection and to minimise the
liability of the family business.
The committee recommends that the Australian Securities and Investments
Commission consult with family businesses to gauge their understanding of the Corporations
Act 2001, in particular directors' duties and liabilities, and work
with Family Business Australia and other interested organisations that
represent family businesses to disseminate information through education and
training. Information could also be usefully provided in plain terms on the
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