The Government led consultation round with industry about the controversial Employee Share Scheme (ESS) is now closed for submissions, and Treasury has said it will not yet be publicly releasing whether it will make changes to the current ESS rules.
Treasury has stated said the Government is committed to addressing the concerns that have been raised by startups in relation to the ESS. With the consultation round now closed, which provided stakeholders with an opportunity to discuss their concerns, industry is now eagerly awaiting an outcome.
Accounting and advisory firm William Buck is one organisation calling on Government to act with urgency.
William Buck Tax Director Greg Travers explained that the current tax rules tax an employee on the value of the shares offered by the startup, either when they are issued (upfront taxed plans) or at a specific time in future (deferred tax plans) with the maximum deferral being seven years.
“Often this results in an unfunded tax liability, where tax is payable on the value of the shares, even though the shares can’t be sold and the employee hasn’t received any cash,” Travers said.
“This is a problem for start-ups where it is not until a “liquidity event” like a trade sale, IPO or commercialisation of a product occurs that the shares have a realisable value,” he added.
The Australian Information Industry Association (AIIA) is another organisation which supports amendments to the ESS.
The AIIA believes the current Employee Share Option Plan (ESOP) arrangements should be amended for businesses, irrespective of size and age, commencing with start-ups and SMEs in order to fast-track the growth of the local digital economy.
Suzanne Campbell, AIIA CEO, said that at a time when traditional industries are exiting the Australian market, the Government must act swiftly to ensure we are strongly positioned to compete in a new global economy.
A common theme in the complaints from business is that the current scheme stifles the ability of local startups to attract and retain the best talent.
“The current policy creates a barrier for emerging, innovative businesses to remain in this country and be successful. Australia will not become a hotbed for innovation if we continue to penalise talent and hamper the success of our start-ups and entrepreneurs,” Campbell said.
Similarly, Travers added that ending up front taxation of employee share options would stimulate more entrepreneurship and investment in business startups.
“Start-ups can rarely afford the salaries that larger businesses can pay, however they can offer their employees a share of the “up-side” by giving them shares in the company,” Travers said.
“Where the taxing point arises before the employee can actually sell the shares, the employee will need to pay a tax liability but won’t have any cash from a sale of the shares to fund the pay. Putting an employee in this type of position undermines any motivational benefits that an employee share scheme could achieve,” he added.