Published on the 13/02/2014 | Written by Newsdesk
The Australian Information Industry Association and Deloitte are among many now arguing for the removal of taxes on employee share option programmes (ESOPs) that are impeding start-ups…
The impost of a tax on employee share options at time of vesting which was introduced in 2009 put Australia out of whack with much of the developed world. The scheme has reduced the number of start-ups overall, increased the number of young companies which fail at the first hurdle and forced others to set up overseas according to Deloitte partner Damien Tampling.
Compared to near neighbours such as New Zealand (which Deloitte described as one of the best locations for start-ups by dint of its ESOP system which only taxes options at the time they are exercised and has no capital gains tax) Australia’s system has actively dissuaded technology entrepreneurs.
A Government review of the regime is widely expected to make changes to the regime before the May budget – what is now at issue is the extent and nature of those changes.
Deloitte has presented treasury with a paper recommending that for start-ups with revenues or $15 million or less, which have been operating in the market for less than 10 years, and for individuals earning less than $180,000 per year, tax on options would only be charged at the time those options were exercised.
In addition it recommends that to qualify for this scheme employees would have to hold share options for at least two years and shares for a further 12 months, providing an important and stable talent base for start-ups offering ESOPs.
This would guard against options being used by wealthy executives in established businesses to minimise taxation obligations by granting themselves options, while making it simpler for start-ups to attract and keep important personnel.
Deloitte tax partner Rob Basker said that this approach was needed as to-date the Australian treasury “has shown little appetite for a holistic change relating to employee share schemes”. By focusing only on the needs of start-ups Deloitte is hoping the reform will prove more palatable.
It’s hard to gauge the revenue impact of the proposal for the Australian coffers, as Deloitte argues it could encourage a greater number of start-ups and ESOPs which would eventually boost the total pool. However in modelling one scenario under the current and proposed ESOP system there was a $2000 reduction in tax costs under the new proposed regime.
AIIA CIO Suzanne Campbell applauded Deloitte’s proposal warning that; “Australia will not become a hotbed for innovation if we continue to penalise talent and hamper the success of our start-ups and entrepreneurs.”
