Startups are pleased by communications minister Stephen Conroy's announcement that the government would conduct a review the tax rules governing employee share schemes, but have suggested the government can do more to aid fledgling tech companies.
Share schemes make it easier for young, cash-starved businesses to attract employees. However, a 2009 budget measure meant that more employees would be taxed upfront for receiving company shares.
Andrew Campbell, co-founder of taxi booking app goCatch, said employee share schemes are vital for startups. His business is currently looking into such a scheme, but Campbell said the process has taken up a substantial amount of his and his fellow co-founder’s time and is full of uncertainty.
“One of the biggest challenges a startup has is attracting talented people and as a startup business you’re restrained with resources, so you can’t necessarily pay people a market rate,” Campbell said.
“Having an employee share options plan is a very important tool to be able to attract quality talent and reward them for the risks that they’re taking on.”
Dean McEvoy, founder of group-buying website Spreets.com, said he also looked into employee share schemes while he was at the company.
“We wanted to do it but couldn’t afford to pay the tax upfront or the tens of thousands of dollars to a lawyer to setup some other scheme which can make it work without paying the tax upfront,” McEvoy said.
He said one solution could be to only tax employee shares if the business is sold or it lists on the stock exchange and shares are traded for cash.
99designs' CEO Patrick Llewellyn said the review is “long overdue” and that the government “got it wrong” with its 2009 changes to the rules governing such schemes.
Llewellyn said an employee share scheme should be easy to administer and involve minimal cost to implement.
“They should [also] ideally be tax effective; that is, make them a capital gain tax event for employees when they receive a realisation,” he said.
The government can do more
While all three startups Techworld spoke to were pleased with the review, they said the government could be doing more to help startups.
McEvoy called for the government to examine capital gains tax rollover provisions.
Businesses pay tax on any capital gains they make, which can include capital gains from selling shares or property. Small business concessions allow businesses to reinvest capital gains into new businesses, McEvoy said.
“The problem is that the way it is set up at the moment, if I have just sold a technology startup and want to invest in new startups, I can’t,” he said.
“It’s because the ATO insists you invest in new companies that have at least 80 per cent of their value as a physical asset.”
McEvoy said that while this is fine for bricks-and-mortar businesses, it is problematic for tech startups, which often only have IP assets.
A person could make $100,000 in the stock market and be taxed 50 per cent, but “if somebody starts a business from scratch, hires people, makes money and sells it in 10 months for $100,000 profit they also lose 50 per cent of that in tax,” he said.
“It’s not the same – you have busted your gut to make this happen, but it’s treated the same and it might be dis-incentivising people from starting a business.”
goCatch’s Campbell believes the government could do more to foster links between businesses and universities. He suggested a model where businesses could go to universities with business problems and have academics carry out research for solutions.
“Universities should be listening to business and setting their research agendas based on what business currently needs [to] get the two sectors working very nicely together,” Campbell said.
“Australian universities do have a legacy culture of shying away from anything that makes money and I do believe that obviously there is a place for pure research.
“However, it should only be a small segment of university research and the majority of university research should be done with the goal of turning that research into real world applications as quickly as humanly possible.”
The Australian Computer Society (ACS) said it supports this idea as “powerful and wonderful”.
“The ACS has been encouraging stronger links between academia and business through the ACS Professional Year and Work Integrated Learning programs,” Adam Redman, head, policy and external affairs at the ACS said.
This includes scholarships that combine university education with up to one year of full-time work experience.
99designs’ Llewellyn commended the government for the reviews, but said ultimately, the success of Australia’s startup environment will depend on access to capital, access to talent and access to customers.
McEvoy also said the reviews would not be a “silver bullet” to the problems startups face.
“We need a culture shift in Australia from digging holes for coal to building stuff that creates value so that kids, when asked what they want to be when they grow up, it’s an entrepreneur or software/technology developer,” he said.
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