Guerdon Associates’ submission to Australian Parliamentary Enquiry on share scheme taxation

The Federal Australian Parliament has standing committees with policiticians representing all major, and some minor, parties to consider legislative improvements. Guerdon Associates is a regular contributor to these deliberations when they touch on company remuneration and governance matters.

While these submissions often take a significant resourcing effort, the firm believes that we have a duty to further the realisation of our vision where well-governed companies are supported in attracting the world’s best talent, improving the economic success of Australian businesses for the benefit of all. It has been worth it, as we have had success with prior submissions. Alas, not all suggestions are adopted.

So, once again, we have had a go. Guerdon Associates lodged its submission for the House of Representatives Committee on Tax and Revenue on the “Inquiry into the Tax Treatment of Employee Share Schemes” (the Inquiry) on 28 May 2020.

Basically, the terms of reference concern whether share scheme taxation has been able to foster entreprenaurialism and start-ups cost effectively.

For those in a hurry, the answer is yes, to a degree. But share scheme taxation can be significantly improved with just a few simple tweaks that, we believe, will encourage many larger and more rewarding opportunities to establish and grow new businesses, and make existing ones more entreprenarial. In addition, changes can be made that balance the encouragement of risk taking by better governing the extent that risk taking can go awry because company management have taken the money and run.

Under ESS tax legislation, tax-deferred options and rights are taxed on exercise rather than on vesting (or when disposal restrictions on the shares acquired on exercise of those rights or options are lifted). Tax can be deferred on rights subject to an immediate restriction on disposal, without the requirement for a forfeiture condition. The maximum tax deferral period is up to 15 years. For qualifying start-ups the tax treatment is more favourable, with no tax on the discount at which options are acquired or on up to 15% of the discount at which shares are acquired, and with capital gains tax only on the value delivered to the employee on share sale (see our summary when the legislation was about to come out HERE).

One of our primary concerns has been with the definition of a start-up. The legislation defines a start-up as an unlisted Australian-resident company that has been incorporated for less than 10 years, with aggregated turnover of less than $50 million (including revenues from associated companies) in the prior tax year and where the market value and other conditions are met for the ESS interests to be granted. It is our view that these are too strict and that some start-up companies and their employees that should be eligible for the tax concessions are missing out.

We have suggested that the definition include listed entities, with the maximum turnover requirement confined to the entity and not its associates, and with the maximum life increased from 10 years to at least 15 years. We also suggest that there be an alternative test to determine if a company is a start-up to do with profit. That is, a start-up would not have a taxable profit. We know that this seems sensible to any business person – but we are dealing with politicians and public servants here.

This would mean a company could  be considered to be a ‘start-up’ if it meets two out of three of (a.) less than $50 million turnover, (b.) less than 15 years incorporation and/or (c.) no taxable profit condition. In our view this is a fairer and more relevant definition.

Add to this one more important consideration – do not limit the definition to non-listed companies. In this way Australia, too, would be an attractive place to incubate and retain the next Tesla and Amazon. In addition, it woud assist companies that have already listed in order to source capital for growth, but find it harder to source rare skills from offshore compared to their offshore competitors because of our ESS tax laws.

We also take the opportunity to point out the unnecessary taxation on unvested and/or unexercised employee equity at termination.  Australia is one of just two countries in the OECD that goes this, placing the country at a severe disadvantage to attract and retain talent. Removing termination as a taxation point would not cost any tax revenue (although it may defer it). Instead it would assist in attraction of key employees, and also with ensuring employees and management are keen to build and maintain a sound legacy for their part of the business after their departure. In addition, the change would also enhance consistency and simplicity and reduce administrative costs for companies.

The full copy of our submission can be found HERE.

© Guerdon Associates 2024
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