Employee Share Schemes have been a hotly debated topic of late, reignited by the proposal to reverse changes made six years ago to the integral structure of the scheme.
By introducing new tax rules in 2009, the Government greatly weakened the scheme as a bargaining tool in attracting the brightest candidates to invest their talents and money in tech startups in Australia; what was once an opportunity had become a deterrent, leaving the industry, until now, alone to fight for itself.
But as of July 1st 2015, Employee Share Schemes will return to the state prior to 2009, offering a new field of play for startup companies.
According to the Department of the Prime Minister and Cabinet, Employee Share Schemes provide employees with shares in a company in conjunction with their employment. In many cases, this right to purchase shares exists at both the initiation and throughout the course of employment, although the right to buy shares is regarded as an option for the employee.
Released within the Department’s report ‘Industry Innovation and Competitiveness Agenda’ is research suggesting that employees are more productive in companies in which they have an ownership interest, and, considering this personal motivation, it is little wonder why. Further to this, Employee Share Schemes are often used overseas as a way to attract high-quality staff, adding to the rate of productivity.
The Government changed how employees were taxed for ESS options in 2009, so that employees would now be taxed for the options when they were provided to them rather than when the options were converted into shares. As Atlassian co-chief executive Scott Farquhar argued last year in the AFR, it’s easy to see how problems arise when these upfront costs are placed on startup businesses.
“To defer the tax [at present] there is not going to be any capital gains discount rate, and if you want the discount you have to pay up front,” Mr Farquhar said.
“We seem to be ridiculously overcomplicating something that should be relatively simple.”
Starting July 2015, the ESS schemes will be reversed, particularly to stimulate the growth of high technology startups in Australia. According to the report, this is to assist small unlisted companies in becoming more competitive in the Australian market.
For employees earning less than $180,000, the first $1000 in ESS interests given will remain exempt from tax. By providing employees with options under deferred tax schemes, the changes allow employees to defer tax until their options have been exercised, while the maximum time for tax deferral will be extended from seven to 15 years.
Further to this, eligible startups will be able to provide employees with discounted shares, with further exemptions and deferrals allowed. These startups will have to meet certain requirements, such as having a turnover of less than $50 million, remaining unlisted, and having been incorporated for less than 10 years.
Together with the Australian Taxation Office, the Department will work to streamline the processes of applying for and maintaining the ESS.
A breakdown of the ESS systems, including start-up concession eligibility and discounts, can be found on the Department website