blog Those of you who were watching closely would have noticed that the Federal Government finally last week released a discussion paper looking at new rules for Australian technology startups (see the media release here), which would make it much easier for IT startups with 10 staff or less to launch share programs for employees without having those programs attract massive taxation headaches. It’s a key issue for Australia’s digital economy which has really held many in the sector back in the past. However, if you listen to the comments of some of Australia’s most prominent IT startup executives in today’s Financial Review newspaper, the proposed changes don’t really go far enough, being more of a token effort. The newspaper reports (we recommend you click here for the full story):
[Atlassian co-founder] Mike Cannon-Brookes … said : “If you look at the big tech companies of the world that have grown, it’s not the first 10 people — they get it off the ground — but it’s people 10 to 1000 that drive it into the stratosphere,” he said.
To my mind, it’s quite hard not to agree with some of the comments in the article. We’re not talking about giant companies here, with huge revenue bases which the Federal Government can get just recompense from. We’re talking about very small companies, which will usually fail, with a handful of employees each, who are reluctant to join a startup in the first place due to the high risk of failure and the low salary incumbent upon such a job. So why doesn’t the Federal Government tax such potentially high-growth companies minimally and incentivise staff to take share packages, so that they are more motivated to help the company success and grow to the level of an Atlassian, instead of crippling them before they even got started? It doesn’t make any sense why this isn’t already the case. After all, there’s very little tax revenue to be found here anyway.
I know this situation first-hand, as the proprietor of a small business in the media industry. That status gets me precisely zero free kicks from the Australian Taxation Office. Instead, I have to pay the same level of corporate tax and file the same paperwork as businesses 10 to 20 times my size, or even more. It’s just crazy — and it’s not a recipe for creating a digital economy full of innovative and fast-growing startups.
Senator Kate Lundy has been pushing this issue inside the Federal Government for some time. But the good Senator is only one driving force. We suspect that the major technology giants are going to have to hire some lobbying firms and appoint some regulatory officers (like the telco sector has had for years) in order to get anything done in this area with the Federal Government. *sigh*
Image credit: Atlassian
Renai,
Through my prior roles with the IT Industry Innovation Council and the AIIA we have pushed really hard behind the scenes for major change in this area for all of the ICT sector for over 5 years now. There have been a number of internal and external reviews during that time and some credit should go to Senators Conroy and Lundy for their role in bringing about this latest external review and putting the issue back on the table again. It is positive also that various organisations such as AIIA, Atlassian, Deloitte, Norton Rose, Google and many others have kept up the rage in recent times.
Sadly however, this review, as with prior ones, is totally overshadowed by a heightened sense of inherent defensiveness and conservatism in the Treasury about potential loss of tax revenue in any change. They simply don’t get that a positive change in this area for all fast-growing technology companies in Australia will ultimately be good for the local economy and in turn, in their language, will actually lead to increased tax revenue in the future.
Until this kind of negative thinking can be reversed (and it would need to come from the top – from PM & The Treasurer down) then all of these reviews and any policy or program change arising will be a compromise from what it should be given the power that Treasury holds.
While the discussion paper provides some interesting international comparative data it really misses the point of trying to understand why fast-growing technology companies (whether they be large like Atlassian or just a small start-up like you ;-) really need change in this area. If they started from first principles with a clear understanding of this then they wouldn’t have to work through the complex myriad of tax alternatives that they have suggested.
Ian, I think this whole issue is overdone. Startup used to be a term that described serious innovation, but it doesn’t anymore. It’s now used pretty carelessly to describe almost any new business. Even attempts to restrict the term to “technology” would be outdated, since there are legions of online businesses that are really just online retailers. Those sort of businesses deserve no special arrangements from the taxpayer. They can stand or fail like everyone else.
A second important point is that many of the Australian promoters of these changes seem to see it as a way to reduce pay for talented engineers rather than as the traditional US mechanism of rewarding early contributors in genuinely innovative endeavours. Cannon-Brookes, for example, thinks companies up to 1000 staff deserve these special exemptions. They don’t.
I think Treasury’s caution is wise.
Tony, it shouldn’t be seen as ‘special arrangements’ for something thats needs to be done, namely a correction of the mess that the government had earlier made of employee share schemes.
Such schemes are not a capitalist plot; they can be an excellent way for a company to provide incentives for employees. Startups usually don’t have a lot of money, and shares allow workers to benefit from the growth of the company.
Share options provide a benefit if the company IPOs and is successful. About 99 percent of startups will never reach that stage, and staff sacrificing salary for options will lose.
There is an important market principle here. Startups that can’t pay for talent have no business expecting special concessions from government or from employees. If they gain those concessions, they can displace other, perhaps better firms, that don’t have those concessions.
Cannon-Brookes’ quibble is about the restriction on the size of the startup. He thinks 15 people is too small. I think it’s fine. That restriction allows for vital early contributors to gain the rewards of their talent.
Hi Tony – thanks for the feedback and an interesting perspective.
I agree that this can not be easily contained to technology firms. In fact it really shouldn’t. We need the smartest people we can get to help build all of our knowledge-intensive services businesses of the future. I note that the related UK scheme, EMI, contains the following hurdles:
“The UK Enterprise Management Incentive (EMI) is available to companies that have gross assets of no more than £30 million, less than 250 full time employees and conduct their trade or activity wholly or mainly in the UK. The company must not trade in an excluded activities, which include banking, insurance or financial activities; farming; property development; and legal and accounting services. ”
Which I personally think is quite a reasonable segmentation. I think if we set the bar too low in terms of size of organisation then we can cut out of the picture those companies than need expert international talent for their early stage development.
I think there is quite clear proof that fast-growing local companies struggle to attract the best possible global talent because of the current taxation regime around share schemes. Its not the panacea for everything related to start-ups, and I agree with that point, but I still think it is unreasonable that we are completely out of line with our current taxation approach versus those existing in countries like the US, UK and Singapore.
Thanks Ian. I agree with you that the UK exclusions are good, and certainly something we should insist on here. (Bankers, insurance, legal, property development – we do not want these guys pretending to be startups in order to dodge tax.)
On the subject of the alleged need to import international expertise I am, as you know, extremely dubious. But, in any case, there is nothing stopping firms providing share options if they really need someone and structuring it via loan arrangements.
Comments are closed.