The expected re-introduction of tax breaks for employee share
schemes has buoyed start-up companies, which have railed against
controversial 2009 changes made by the Labor government.
The government is expected to unveil changes to the taxation
system in its National Industry Investment and Competitiveness
Agenda on Tuesday, but will restrict the policy wind-back to
start-ups. Early stage companies have complained that existing
rules have prevented them from luring talent.
The current system requires the allocation of shares or options
to be taxed in the year they are received. The government removed
the ability for employees to choose to defer taxation on a stock
plan until a later time such as when shares are sold or options
exercised, except in very limited circumstances.
This means employees get taxed on money they are not making.
Startup investor Steve Baxter said the changes were long overdue
and would cause a boom for the tech community and broader
"These rules have been a massive problem for tech startups,
and if they're changed, we'll see better remuneration and
engagement within these companies and more of them."
Employee share option schemes enable young companies to offer a
portion of the business to match the generous salaries proffered by
companies such as Microsoft and Google, which are bidding for the
same technical talent.
"Workable employee share scheme tax laws will see better
remuneration in startups that will be able to access better
staff," Mr Baxter said. "It will mean founders can put
more cash into the business and incentivise their staff to work
Norton Rose Fulbright partner Nick Abrahams said partially
unwinding the laws made sense as they had served to hold back a
fast growing local industry.
"Having taken [stock options] away over the last few years
it makes it very, very hard for entrepreneurs to incentivise
staff," Mr Abrahams said.
"By not having an effective ESOP [employee stock ownership
plan] regime we do stymie one of the major forms of capital that is
available to early stage companies elsewhere in the world. It's
generally made it harder for companies to grow because they need to
pay people in cash rather than equity."
Many in the startup community liken the current tax system to
charging every person who buys a lottery ticket $10,000 just in
case they win.
The Tax Institute senior tax counsel Robert Jeremenko slammed
the decisions leading to the existing regulation as among "the
worst examples of knee-jerk tax policy announcements".
"The rules can operate unfairly and impose a significant
tax burden on employees as well as additional compliance costs on
employers," he said.
"It is yet another lesson that tax changes must be
carefully consulted upon and throughly thought out in order to
avoid creating a dog's breakfast of the law."
CPA Australia head of policy Paul Drum said that the current
rules were contrary to the general tax principles that waited for a
"triggering event" before applying tax, rather than
deeming gains and losses.
It was just one of a raft of measures to improve Australia's
competitiveness expected out of upcoming reviews – including
the red tape review, the federation and tax white papers, and the
financial systems inquiry – Mr Drum said.
He said he was hopeful that it showed that the government was
looking at tax in a more open-minded way than previous
"Otherwise people are just going to take their startups
offshore," he warned.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).