Proposed update for Employee Share Scheme

A new report indicates that the federal government is set to look into the possibility of overhauling the tax treatment of employee share schemes (ESS). Start-up businesses say this is a necessity in order to promote growth.

Employee Share Scheme Infographic
The government is apparently aware of the difficulties some sectors of the economy - in particular start-ups - currently face with regards to employee shares. The government plans on consulting with industry leaders to further understand the impacts that tax and administration requirements have on the schemes. In that regard, the government has ensured that it wants to have a flexible and simple incentive system for employees of start-up companies that protect the integrity of the Australian Taxation system.

Research shows that a renovation of the tax treatment of employee share option programs is essential to the growth of the start-up section in Australia; it’s an attractive option that entices highly talented individuals to businesses, while conserving cash.

It allows start-up companies to obtain leading talent to their business, by offering their staff a percentage of the future company on top of their (often low) wages.
However the current system is complex in nature and has detracted Australian start-ups from executing the system. One of the key drawbacks is that employees find they can be held liable for considerable amounts of tax, based on the asset’s value, even if the company is not generating any capital.

It is imperative that an update of the taxation rules around the scheme occurs to void us of the current complicated and complex system. In comparison to US-based companies wherein an ‘off-the-shelf’ program is used and every lawyer in the known region knows how to manage the process.

The current system has a very narrow-minded approach and fails to comprehend the numerous companies that would profit from the application of such schemes.
Start-up companies are in a league of their own and vary substantially. These different characteristics need to be taken into account and systems that help start-ups grow need to be further implemented.

Start-ups are constantly trying to compete with the big boys in businesses, whether it be Telstra or Sony or Apple; they need the expertise of highly talented employees more than ever to help their company succeed. While they may not be able to compete with the same level of salaries as the Microsoft’s of this world, they can offer a literal share of the business, which has proven to be a profound way of keeping talent.

Unfortunately what start-up companies often find is that the process to actually implement the employee share scheme is long, tiresome and costly. There is currently no standard way to do it and that is essentially what is causing problems.

Because there is no generic system in relation to implementing an employee share scheme, start-up businesses have found they have to speak to several different accountants, lawyers and other entrepreneurs who all come revert back with their own different answer.

This proves to be cumbersome and time consuming with businesses still being left in the dark. For an employer, they need to have a solid understanding of what the government wants, rather than encountering hurdles and jumping through hoops.

The good news, at least is that the government does want to address a few current concerns, including:

•    Retain the current arrangements
•    Defer taxing point or payment of tax
•    Tax ESS benefits for ‘start-ups’ at a lower rate, and
•    Increase the ESS ‘up-front’ discount

Valuation Methodology
•    Provide alternative valuation methodologies that use information currently held by companies, and
•    Retain the current methodology, but update the statutory tables in the income tax law

Other ideas that have been circulating include an application process wherein start-ups apply to a federal body. Whilst these changes seem to be heading in the right direction, most start-up companies would feel that it might be too little, too late.

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