“Now we are serious” – Australian government to act on employee share plan tax
29/01/2014
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Consistent with government announcements while you were at the beach over the summer break, Treasury have asked for submissions on employee share scheme (ESS) taxation to encourage start-ups and innovation. Be quick – submissions are due in this Friday, 7 February 2014.

The new consultation will address:

  1. The 2009 tax changes and their effects on business
  2. The barriers to offering an employee share scheme
  3. The steps that should be implemented to overcome these barriers
  4. The broader economic benefits in implementing these steps
  5. The key characteristics of start-ups that are most likely to make use of an employee share scheme
  6. Costs and issues associated with implementing an employee share scheme (e.g. re valuation and regulatory compliance).

The announcements and press releases from seven government departments on this subject underline the commitment to doing something. But it is the ‘something’ that is still up in the air.

Clearly, action would most likely have minimal effect on tax revenues. In 2010-2011 the taxable value of employee share scheme benefits was over $2 billion. So kiss goodbye any thoughts of major ESS tax reform that would apply to all ESSs. Instead, the stated focus is on “start-ups” and “innovators”.

This is the first sticking point. What, exactly, does one of these animals look like? Already the suggestions coming thick and fast would mean more red tape. Something nobody wants.

Instead, we suggest the government look a little more laterally. When and why are stock options used? Typically, they are used when a company wants to conserve cash, and has considerable growth potential. They are used to attract employees willing to share the risk, receive less cash than they could otherwise receive elsewhere, and see the potential for a handsome return. Therein lies a simple answer.

Define companies that can be eligible to issue tax deferred share options as “high growth potential” companies. These can be defined as those with negative cash flow from operations. This would encompass all ‘start-ups’, and is easily verified. Some would also say that it captures companies in trouble who are not start-ups. Exactly. These concessions will extend their lives, and allow them to continue employing people willing to accept options in lieu of salary who would otherwise be without a job. Treasury will forego no income from start-ups that fail to start-up, or from employees in troubled companies who would otherwise be without a job. And, longer term, the potential economic benefit from successful start-ups and turn-arounds would make a positive contribution to Treasury’s coffers.

We would counsel against limiting the availability of tax deferral on share options to “small” companies, with arbitrary and difficult to administer definitions such as under 250 employees (as in the UK), or of a limited revenue size (say under $15m). Facebook, Amazon, Yahoo and many other hi-tech success stories were not at all “small” when they managed to trade out of the red, and employee stock options were critical in their quest for talent and cash conservation.

At a recent meeting with Treasury, the ATO and other departments attended by tech entrepreneurs, funders, Guerdon Associates, and other advisers, there was unanimous agreement on the one ESS tax reform that would be a game changer for breathing life into start-ups. That is to the timing of the tax on employee share scheme benefits. The simple message was, levy tax on the share scheme benefit when the benefit has been realised in cash.

If you are director or entrepreneur involved in growth opportunities and want to get involved, consider a submission. See HERE.

© Guerdon Associates 2021
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