The Australian government to review better laws to encourage employee share plans in start-up, R&D, and speculative companies

The Australian government has undertaken to review the tax treatment of employee share schemes (ESSs) and develop guidance to reduce the administrative burden of establishing such schemes.” 


The government appears to have acknowledged that its 2009 changes to the employee share plan tax rules were not such a good idea after all. The acknowledgment and belated action would not have been necessary if note was taken of the many submissions pointing out these problems at the time the legislation was drafted (for example, see Guerdon Associates 2009 submission to the Senate Economics Committee HERE).


The commitment was part of ‘Action 7’ of 24 actions the Gillard government will take towards achievement of its 8 National Digital Economy Strategy goals (“which together form a vision for Australia to be a vibrant, thriving, world-leading digital economy”).


This was revealed in a report entitled “Advancing Australia as a Digital Economy: An Update to the National Digital Economy Strategy”, released by Senator The Hon Stephen Conroy, the (then) Minister for Broadband, Communications and the Digital Economy, on 12 June 2013.


The report quotes research indicating that only 4.8 per cent of Australian technology start-ups successfully scale to sustainable businesses, compared with 8 per cent in Silicon Valley and 6.7 per cent in New York.


According to the report, “several industry sectors have raised concerns about the current tax arrangements, particularly as they apply to share options offered by start-up firms. Under current arrangements, staff working for start-ups who receive shares or options as part of their remuneration must pay income tax at the time those shares or options are received. However, early stage start-ups usually have no revenues, and the shares or options are generally not tradeable and may have little or no value. Indeed, given the high-risk nature of start-ups, in many cases an option may never be exercised. Industry is also concerned about the difficulties presented by additional valuation costs for start-ups that result from taxing shares or options on receipt, and the high overall costs of establishing ESSs. These complexities can make ESSs unattractive for many start-ups, with possible negative implications for the development of start-ups in Australia.”


Stakeholders have also argued that the Australian approach contributes to difficulties in attracting high-quality expatriate and overseas talent and convincing Australia’s best to remain here.  Other countries, including Singapore, the United Kingdom and the United States, have a range of schemes that provide incentives for employee share ownership. These schemes have a variety of taxing points, tax rates and eligibility criteria.


The report includes an undertaking that “By December 2013, the Government will consult with stakeholders to determine the most effective measures to address the barriers faced by start-up companies, including:


·         developing guidance to reduce the administrative burden (meaning the cost of valuing shares and options) of establishing an ESS

·         adjusting the valuation methodology of options

·         examining the point at which share options are taxed for start-up companies.”


It is understood that the current opposition shadow minister for communications, The Hon Malcolm Turnbull, had similar concerns with the legislation when it was implemented. In addition, the shadow treasurer, The Hon Joe Hockey, noted the opposition’s policy to review employee share and option plan taxation (see HERE). So we are hopeful that the initiative will not be lost if the opposition becomes the new government after the forthcoming election.


The Minister’s press statement can be seen HERE.

The Update to the National Digital Economy Strategy can be found HERE.

© Guerdon Associates 2024
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