06 Feb 2014
New review into start-up employee share schemes
by Mark Friezer
The Government's review of the taxation of employee share schemes for start-up companies is to be welcomed.
The Government has announced that it is going to look at changing the rules governing employee share schemes for start-up companies.
Back in August 2013, the Labor Government started a similar process and issued a Treasury discussion paper. With the election and change of Government, the process was put on hold.
The new employee share plan tax rules which came into play in 2009 have created significant problems, particularly for start-ups. Previously, the "discount" on share options was only taxed when an option was exercised. The new rules accelerated the taxing time to the point at which the options vest. This means that if an employee is granted an option, that employee needs to include the market value of the option in assessable income in the year that it is granted, unless the option is subject to forfeiture. The problem with this scenario is that the tax liability accrues even though the employee hasn't realised any economic value for the option.
Employee options arrangements are fundamental in remuneration structuring for start-ups, particularly in the technology sector. Typically, these companies do not have the cash-flow to reward employees by conventional salary or cash bonuses. The granting of an option is a cost-effective way of attracting and incentivising talent.
It may be that the Government will look to go even further than changing the taxing point – addressing the need for a simplified regulated scheme which can be implemented in a cost-effective manner off the shelf without the need for complex structuring and attendant legal and accounting costs.
The reactivation of the inquiry by the Coalition is commendable and should result in a tax system without the competitive disadvantage – in keeping with the Coalition's desire for Australia to be "open for business".
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