21 Feb
Time to get familiar with new legislation on asset acquisitions and disposals.
By Ashleigh Swayn - CEO
A big story across the media at the moment is the planned Facebook IPO and Mark Zuckerberg’s potential personal tax liability of as much as $2 billion should he exercise stock options before the public sale.
Mr Zuckerberg’s stake in Facebook is estimated to be about $23 billion. He also holds options to buy another 120 million shares at just 6 cents each. In its IPO filing, Facebook values its shares at $29.73. At that price, Mr Zuckerberg's options would amount to $3.6 billion. However analysts are predicting the shares will change hands for more like $40 each in which case his options would be worth more like $5 billion.
Big windfall with strings attached
The windfall he will receive upon exercising these options will be treated as ordinary income, and Mr Zuckerberg will face the not so ordinary tax bill of up to $2 billion if the $5 billion predication is realised. Whether this will make this the largest taxpayer in US history remains to be seen, but all reports indicate the social media scion as taking it all in his stride. While lawyers and tax specialists alike weigh into the debate as to whether he could have and should have structured his interests in a more tax effective way, the argument is purely academic.
What is even more interesting is how much income tax he will end up paying on the rest of his stock that he doesn’t immediately. And this is anyone’s guess, though the thinking is that this will be negligible if anything at all.
Remain tax free
You see, he can simply use his stock as collateral and borrow against this tremendous wealth to sidestep tax liability. If he takes a leaf out of Steve Jobs’ book and decides to hold onto his shares and never sell any of them, his beneficiaries will only be taxed on any appreciation in value since his death when they eventually decide to sell. This means that the entire appreciation of the shares during his lifetime will remain tax free.
Of course tax laws all over the world can be stubbornly complicated and confusing even if you don’t have Mr Zuckerberg’s incredible wealth.
Indeed, all too often tax bills become payable long before you receive the income. For instance, income from vested share options or share plans can only be realised years later, yet you’re liable for the tax bill more or less straightaway.
This scenario presents two challenges, the first of which is the need to fund the tax bill yourself without the help of the income. This is akin to having to pay income tax on your salary without actually receiving the salary. For most people this means having to borrow it or dip into their savings.
The second challenge is that the vested shares could decrease in value or end up worthless yet you don’t get your tax back. The risk of the share price fluctuations resides with you not the ATO. So if you had to borrow to fund the tax bill in the first place, and your shares actually decrease in value, then you’ll end up with a debt and a depreciated asset!
How you structure your business and stock options or even your remuneration package can have a profound impact on your tax liabilities as well as eliminate risk to your assets in the event of litigation or bankruptcy. Whether you are a sole trader, setting up a partnership, growing a company or planning your IPO establishing the optimal structure for your business today will affect your long term business success.
If you'd like to know more about structuring your business and personal finances for tax effectiveness please get in touch with the team here at Countplus mbt.