One of the best ways of attracting and retaining high-quality staff is to provide them with an ownership share of the business they’re helping to develop. It creates an obvious incentive for them to throw their faculties behind a common cause in the hope of sharing its future success and reward. For technology start-ups with limited resources in particular, it is the only way they can compete for staff with established companies who can offer higher pay and other perks.
Offering equity to employees is commonly achieved under an “employee share scheme” (ESS), through which employees are offered discounted shares or options in the company they work for. Unfortunately since 2009 they have been subject to unfavourable tax treatment in Australia – in essence, under such schemes employees are being taxed on their gains before they are even realised. This has effectively ended ESS for start-ups, in turn driving Australian talent overseas.
The government is proposing to amend the tax treatment of ESS from 1 July 2015. If an employee earns under $180,000 per annum, the existing tax concession will be retained which exempts the first $1,000 gained from ESS interests. However if an employee is issued with options, they will now be able to defer the tax on them for 15 years instead of only seven. And if an employee of an “eligible start-up” has held the options or shares for at least three years, the taxation on them can be deferred until sale, and any discount of up to 15% on their price can be exempt from income tax (although CGT is still paid on sale).
There are still some problems with the proposal. For example, a business will only be “eligible” for the start-up concessions if it has an annual turnover of less than $50 million. This excludes those with a high turnover but small margins, such as financial services and payments systems businesses. A company will also not be eligible if it is listed on the ASX, a path through which many technology companies do take to raise capital.
Despite the proposal’s shortfalls, it provides a welcome change from the current stymied ESS situation in Australia.
To ensure your employees reap the greatest gain from your ESS, and so that your business can flourish, we recommend seeking professional legal and financial advice to enable you to execute an appropriate ESS once the proposed amendments are implemented.