IPA slams current ESS tax arrangements

A professional body of accountants has slammed the current tax arrangements around employee share schemes (ESS) – it says the regulations are building an anti-competitive environment for entrepreneurs.

The Institute of Public Accountants (IPA) believes the current ESS regulations – which were last changed in 2009 – is driving innovation offshore.

The current rules effectively treat employee share options as income, which is then taxed at the employee’s marginal tax rate.

In cases where no concessions apply, any discount on the market value of an interest in a share or right provided to an employee under an ESS is taxed as part of the employee’s taxable income in the year it is acquired, rather than on disposal.

Herein lies the problem, IPA chief executive officer, Andrew Conway says.

“One of the most effective strategies for a cash-strapped entrepreneurial start-up business needing to attract talented staff is to offer an employee share schemes,” Conway said.

“Innovation is vital to Australia as it transitions from traditional employment sectors to a digital economy.  New innovative technology start-ups have the potential to generate new markets and significant employment growth,” he added.

Without the cash flow to offer a competitive wage, Conway believes an equity stake is the best option to attract and incentivise employees. However the current regulations rule out this strategy.

“This puts start-ups at a huge disadvantage compared with more supportive regulatory environments in other countries. Consequently, we read too often of innovative, entrepreneurial businesses setting up shop overseas,” Conway said.

Considering the high-failure rate of startups, the IPA likened the problem to charging a tax on lotto ticket before it is drawn and without the winnings.

“The IPA recommends the review of the taxing points at which share options are taxed, particularly for small business start-ups,” he added.

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