The government has formally introduced legislation to reform how employee share schemes (ESS) are taxed in an effort to make it easier for startups to attract and retain talent.
Minister for Small Business, Bruce Billson, introduced the changes to ESS taxation in Parliament this morning as part of the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015.
The bill formally proposes the changes announced last year in the government’s $400 million Industry Innovation and Competitiveness Agenda. A was released in January.
Billson said the government wants to bring the amendments into effect for new shares and options issued from 1 July 2015.
“Employee share schemes support and encourage innovation,” Billson said as he introduced the bill.
“They energise enterprise and entrepreneurs.”
Billson said the schemes help employers to attract and retain talent, and are especially helpful for startups and other small businesses.
“We know small firms sometimes lack the cash to pay salaries that can allow them to compete internationally. Employee share schemes allow firms to be globally competitive by supplementing employees’ salaries with equity in the company they work for.”
The legislation would reverse tax rule changes made under Labor in July 2009 that have discouraged Australian startups from providing share options to employees. They required that the employee is taxed on the value of the share option when it is issued, before any payments are made.
The change will mean that options won’t be taxed until the employee executes the option. This is better for cash-poor early stage startups, which can use share options as an alternative to a larger salary.
The bill would also extend the maximum time for tax deferral from seven years to 15 years, and doubles the maximum individual ownership limit to 10 per cent.
The proposal includes $200 million in tax incentives over four years for employee share ownership for companies with less than $50 million that are unlisted and younger than 10 years old. While acknowledging some startups’ concerns about these limits, which leave out older and larger companies, Billson said “all policy needs to be weighed against other priorities and the cost to taxpayers.”
“On balance, we’ve decided to keep the additional concessions focussed on genuinely early-stage firms that are more likely to have cash-flow challenges,” he said.
Responding to another concern raised during the consultation on the draft, the final bill clarifies that the 50 per cent capital gains tax discount will be available for tax options issued to beneficiaries of the startup concession even when the underlying shares are held for less than 12 months, Billson said.
StartupAUS director Peter Bradd applauded the introduction of the bill.
“It is encouraging to see the government recognise the potential of Australian tech startups, and take steps to rectify the tax treatment of share schemes,” he said.
“Changes to the ESS will help Australian startups become strong drivers of increases in job creation and, because many help to drive technological change, this will lead to productivity gains and job creation for our economy.
“To see a government minister talk about reducing unnecessary red-tape - and take solid action to reduce regulatory costs for startups is also hugely encouraging. The prohibitive costs, such as those required to prepare valuation for tax purposes, is something that has held back many Australian startups.”