Australian government proposes changes to tax of share plans for ‘start-ups’

The Government has released a discussion paper as the first step in a review of the tax treatment of employee share schemes (ESSs) for ‘start up’ companies, with the aims of encouraging such schemes and promoting growth.


The review recognises the significant complexities and compliance burden of the existing regime, and its adverse impact on speculative, start-up and R&D companies (which we and other members of the business community were at pains to point out prior to the 2009 ‘reforms’ – see HERE). 


Unfortunately, the narrow definition of ‘start-up’ company proposed by the government would seriously limit the benefits of any changes.  In particular, the exclusion of listed companies suggests the government really does not understand the important role ESSs can play in small, cash-strapped, listed companies.


The proposed ‘start-up’ definition would require that a business:

  • have 15 or fewer employees
  • have aggregated turnover of less than $5 million and not be a subsidiary, owned or controlled by another corporation
  • have been in existence for less than five or seven years (to be confirmed)
  • be providing new products, processes or services based on the development and commercialisation of intellectual property
  • be unlisted, and
  • have the majority of its employees and assets in Australia.

It is unfortunate that there appears to be a very limited understanding of the various capital raising stages that start-ups need to go through, whereby seed and “angel” capital, while progressively diluted with additional raisings and new stock issues, stand to receive mammoth returns if the investment comes good. Investors know this.  The proposed concessions, which would only be available in the initial (unlisted) ‘start up’ stages, will not do much to encourage investment unless they are allowed for employee option grants at the next three stages of capital raisings. This is because options are provided in lieu of cash salaries for talented and entrepreneurial employees. If tax deferral is not permitted, investors will need to find extra cash to pay for the extra employees at each stage – thereby reducing the funds available for investment and potentially hampering growth. If this is not permitted, the good ideas and the entrepreneurs who created them may best decamp to California where this is permitted. And the value created initially in Australia (and subsidized by tax deferral) will be monetized in the US.

Bizarrely, the Government has also indicated that companies involved with mining and mineral exploration, which form a significant proportion of Australian ‘start ups’, may be excluded. In these cases the dirt will just remain undug.

The narrow definition would limit the benefits of any changes.


The review will look at:

  • developing guidance to reduce the administrative burden of establishing an ESS
  • adjusting the valuation methodology for options, and
  • examining the point at which share options are taxed for start-up companies.

The alternative tax treatments canvassed in the discussion paper include:

  • deferring the taxing point or payment of tax
  • taxing share schemes at a lower rate, or
  •  increasing up-front discounts available.

The discussion paper is available on the Treasury website HERE.


The Government has also agreed to review the statutory valuation tables (for valuing unlisted rights issued under an ESS), but this will be undertaken separately from the current consultation and at a date to be determined.


Submissions were due by August 23, 2013, but have no been deferred until after the federal election.

© Guerdon Associates 2024
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