Loan Plans

Loan Plans are fair weather friends. They do well over the long term when shares are rising.  But if prices fall, they can bite hard - and both the employer and the employee get to feel the pain. 

Employee risk

When the share price falls below the price paid for the shares by the employee, then the value of his shares will be less than that of the loan made to him to acquire the shares.  This means that, if the employee is obliged to sell the shares,  he will have to make up the balance of his debt to the employer out of his own pocket.

Employer risk

To save employees who are out of pocket, employers can (and sometimes do) forgive the employees’ debts.  But then the employer becomes liable to pay Fringe Benefits Tax (FBT) on the amounts waived.

Also for the employer there is the further consideration that international accounting rules now require that these loans be "expensed" or charged to the company's Profit & Loss account.  Previously they had been carried unobtrusively on the Capital account.  The change is a discouragingly painful one, especially for publicly listed companies.  

 

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