Australian tax rules may stunt growth of startups and push them out of the country, according to the Norton Rose law firm and a survey by Deloitte.
Three-year-old changes to tax law require that the employee is taxed on the value of the share option when the option is issued, before any payments are made.
The tax rules discourage Australian startups from providing company shares to employees, eliminating a key non-cash incentive that startups can use to attract and retain “quality talent,” Norton Rose attorney Nick Abrahams told Techworld Australia.
Abrahams has met with various members of government about the issue and believes he has found “some pockets of support,” he said. However, more engagement from startups is needed to change the law, he said.
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“There is some interest down in Canberra perhaps in getting a change, and if it doesn’t happen in the next couple of months, we start getting very close to an election and it’s unlikely we’ll see a change.”
“By giving the employee an option, you actually give them a tax liability,” said Abrahams, who works with fast-growth startups. Instead, the moment of taxation “should only occur when funds have been received,” as is done in the US, he said.
Without the ability to provide share options, budget-constrained startups must either spend more cash to hire employees or move overseas to a country with more favourable tax laws, he said.
The government’s intention was to prevent big companies from issuing options to senior executives, Abrahams said. However, the attorney said Parliament should amend the law to make an exception for early-stage startups.
Norton Rose and Deloitte released a survey showing that while 95 per cent of companies like the idea of employee share option plans (ESOPs), only 37 per cent had provided share options to employees in the three years of the law’s existence. Of the companies that didn’t provide share options, 81 per cent blamed tax rules.
Deloitte found that 89 per cent of respondents said they would be more likely to issue share options if employees were taxed on financial gains at the time of funds received.
“Employee share options are a flexible and low-cost way for fast growth businesses to compensate, attract and retain high-performing talent who can be the difference between a garden shed business and a household name,” Deloitte Tax partner, Roan Fryer, said in a statement.
“However, the associated tax rules here in Australia make them difficult and expensive to use,” he said.
“There is a clear opportunity for business to work with policy-makers to improve the current situation, where ESOPs are left in the ‘too-hard bucket’ and help transform them from a barrier into an enabler of innovation.”
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