The Productivity Commission’s draft report on Business Set Up, Transfer and Closure, (May 2015) includes several interesting proposals and, yet again, calls for the removal of the cessation of employment as a taxing point under the employee share schemes tax regime.

The inquiry terms of reference established by the federal Treasurer were for the Productivity Commission (Commission) to examine barriers to business entries and exits and identify options for reducing these barriers where appropriate, in order to drive efficiency and economic growth in the Australian economy.

As the Commission report notes, the inquiry is about the impediments faced by those setting up, transferring or closing businesses in Australia. Such impediments arise, for example, from regulation, from the misguided participation of governments in markets, from industry-specific arrangements and interactions, or from broad cultural features (such as attitudes to entrepreneurialism or to business restructuring).

Business insolvency also results in losses to equity and debt holders, and to employees. Different approaches to managing insolvency can affect the efficient provision of finance and labour.

A few matters that caught our attention include –

 A recommendation that if the Australian Government intends to provide assistance to small start-up companies with limited access to capital via additional tax concessions under an employee share ownership scheme, eligibility should be based on the number of employees in the company,rather than using turnover. The Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, as passed by Parliament on 25 June 2015 uses turnover rather the number of company employees to assess company size.

•  A recommendation that the Australian Government should make legislative changes to remove the cessation of employment as a deferred taxing point for equity or rights granted by an employer. The Productivity Commission recommended this change in their 2010 report on executive remuneration.
• A recommendation that all aspects of the taxation and effectiveness of employee share schemes should be reviewed five years after commencement of the revised regime on 1 July 2015.
• To address the problem of ‘phoenix business’ activity (that is, the shifting of a business’s assets but not liabilities away from a distressed business to a newly created company that continues to trade free of tax and other debts from the distressed business, which is reported to involve around 6000 businesses, at a total cost to employees, business and government of $1.8 to $3.2 billion per year), the Commission has proposed the introduction of a system of director identification numbers, underpinned by an identification process along the lines of the 100 point identity check required to establish a bank account.According to the Commission, this would enable the monitoring of director registration (including the detection of disqualified or fraudulent directors), the collection of data regarding director appointments over time (to establish patterns of director involvement in repeat business failures) and detection of possible fraudulent and phoenix activity by the Inter-agency Phoenix Forum and investors.

The Commission’s final public hearing on the draft report is to be held in Canberra on 30 June. Written submissions close on 3 July.

The final report will then be prepared, and will be forwarded to the Australian Government by the end of August 2015.

The Productivity Commission’s draft report is available HERE.

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