The current tax treatment of employee share schemes in Australia puts our local start-ups at a significant commercial disadvantage to their overseas competitors.
Employee share schemes should allow early stage start-ups to attract and retain talented and skilled employees without having to pay them large initial salaries (which the start-ups generally can’t afford) by allowing the employees to instead benefit from the upside and share in the risk of the business alongside other investors and founders.
The current regulatory framework was introduced in Australia in 2009. It was intended to stop executives exploiting the existing system. Unfortunately, the unintended consequence of the changes was to create a significant obstacle to innovative start-ups.
As the laws currently stand, the key issue in Australia is that employees can be liable for an upfront tax charge on the value of shares or options that they receive under an employee share scheme. This means that tax is owed immediately on shares or options where the value often can’t yet be realised, to be funded from income yet to be produced. Often the employee has no way to sell the shares or options (because there is no tradable market) and end up saddled with an immediate tax liability for the deemed “income” that they have notionally received.
It is possible to structure employee share schemes that address this upfront tax issue, but this is complex and hence expensive, and thus out of range for most small start-ups.
On 7 February 2014 Treasury completed a round of public consultation into employee share schemes and at least three cabinet ministers, including Treasurer Joe Hockey, Communications Minister Malcolm Turnbull and Small Business Minister Bruce Billson are reported to be in favour of revoking the 2009 changes.
As such, it was widely hoped within the innovation sector that changes to the current framework would be announced in the recent Federal Budget. Unfortunately, however, the Budget was silent on this issue. With industry insiders tipping that the changes will be part of Prime Minister Tony Abbott and Industry Minister Ian Macfarlane’s national industry investment and competitiveness agenda to be released later this year, we are left with an uncertain wait.
Employee share scheme reform will put the Australian innovation sector back on a level playing field with its overseas competitors. Small start-ups need the ability to attract and retain the people they need to build strong, successful businesses.
If you require assistance with an employee share scheme, please contact our firm.