news The new Coalition Federal Government has stated that it is “committed” to addressing the ongoing concerns Australian startups have with tax arrangements for employee share schemes, re-opening consultation on the matter for two weeks late this month and early in February. Any opening up of the scheme is likely to be welcomed by Australia’s IT startup sector.
The issue has been a long-running one affecting Australia’s rapidly growing IT startup sector, particularly as the latest wave of companies, including companies such as Freelancer and Atlassian, grow and seek to take at least a portion of their stock public. Startup executives have regularly criticised the Government’s stance on the issue, which is seen as unfavourable compared with the more liberal taxation policies of other countries such as the UK and US.
The last set of key changes made to taxation law in the area took place back in 2009, when Labor sought to rein in the ability of some employees to achieve better rates of taxation by placing some of their remuneration in company stock. Labor had sought to examine the issue before the September Federal Election, but did not take timely action to address the concerns.
In an interview with Business Review Weekly as early as July 2013, then-Shadow Treasurer Joe Hockey described Labor’s approach to the issue as “a massive handbrake on start-ups in Australia” and “an obvious area for change”. “So many start-ups have remunerated their senior employees with share options and the Australian Tax Office is now hitting them with a tax liability for what they may receive, rather than actually what they have received,” the Liberal MP added at the time. Communications Minister Malcolm Turnbull — currently in the US meeting with technology companies and policy makers — has also publicly noted that he supports a review of the scheme.
Late yesterday, the Treasury published a statement on its website noting that the Government was “committed to addressing the concerns that have been raised by startups in relation to Employee Share Schemes”.
The statement noted that the Government wouldcommence direct consultations with interested stakeholders for two weeks commencing 28 January 2014. Consultations will be conducted in Melbourne and Sydney, with the option to hold teleconferences with those otherwise unable to attend. The consultations aim to provide stakeholders with an opportunity to discuss their concerns in relation to the existing Employee Share Scheme arrangements for startups.
The consultations, according to the Treasury, will focus on the 2009 changes and their effects on businesses, the barriers to offering an employee share scheme, what steps should be taken to overcome these barriers, what would be the broader economic benefits in implementing the steps, and associated issues. It appears the Government is also interested in discussing the definition of a startup company per se and determining what types of companies could most benefit from changes to the ESS scheme.
opinion/analysis
It seems likely that there are two competing areas here which need to be successfully balanced out in order for a successful outcome to be achieved.
Firstly, Labor was right to be concerned about this issue back in 2009. It is common practice for large companies to funnel huge amounts of executive remuneration through employee share schemes. We’ve all seen examples of huge executive payouts issued on this basis. And the tech sector certainly has a history of rorting these kinds of schemes. One need only look at the SEC’s examination of Apple’s share issuances to senior executives such as Steve Jobs throughout the late 1990’s and 2000’s to see that in action.
However, I think there is universal agreement in Australia’s technology sector at the moment that Labor’s 2009 reforms went too far, and didn’t differentiate enough between the needs of small, fast-growing startups and large, established companies. In order to grow a sustainable IT startup sector in Australia, changes are needed to taxation law in this area. The ATO needs to be able to achieve more granularity in its approach here.
I would say that most people probably hope the Coalition’s eventual solution balances both these needs and doesn’t go too far to swing the situation in the opposition direction to Labor. Usually it’s the case that all things are good in moderation. After all, that’s how our entire society functions at the moment — our economy is fundamentally a capitalist one, but tempered with socialist tendencies to curb capitalism’s worst excesses and protect the vulnerable.
The two issues as I see it.
The value of the shares issued being taxed when that value may never be realized.
Wouldn’t they just pay capital gains when they divest the shares, since they haven’t paid for share the capital gain should be the full value at sale. That way the real income from the shares gets taxed eventually anyway so what is the issue.
Taxation on dividends. Well income from dividends is taxed like any other income, you do get a credit for tax the company has paid. The franking credit is a none issue because if it had been paid as income it would have reduced the companies tax liability anyway so the amount of money collect is the same.
The only people missing out on their slice is the state governments who don’t get to collect payroll tax on any of this.
There a likely some loopholes to avoid paying the capital gain so they just need to close that up.
I was offered stock options by my employer (large multinational, well-established in the It universe) last year. However, I was unable to accept them because of the ATO’s insane policy of taxing you on them at issue time *and* as soon as they get overwater *and* when you sell them.
Somehow whoever manages our stock plan didn’t get the email where I very clearly refused the options, so when our annual payment summaries and FBT statements were sent out, I was sent a bill for the (un-accepted) options because they were now overwater (ie, above the strike price). The bill was about 4k. On 1500 options. Which had not vested yet, and wouldn’t do so until 2016. I did manage to get that corrected, fortunately.
The ATO was very clear that if I accepted the options at all, then they’d demand tax on them if I sold them, or if I took ownership of the shares the options covered.
It’s not just startups that need to be heard when it comes to stock options, it’s everybody.
I totally agree that options need to be carefully handled by the ATO in order to reduce the ability of CxOs et al to use them as a tax dodge. However, I don’t see why that requires punitive taxation on never-realised gains.
I feel people’s pain in this area. The ATO has started pre-taxing me on expected “profits” made by Delimiter. Of course, I don’t usually make a company “profit” per se — if I make more money, I just pay myself more salary. The ATO will eventually need to reimburse me the tax on the “profits” they confiscated over the past 12 months. However, for that period, they get to hold onto my money … it’s crazy.
You can vary the amount of tax that you need to prepay down or even revise previous quarters lodgments. If you do this, just beware that you need to have paid 85% of that years balance over the year.
This is a very significant issue which is holding back many Australian entrepreneurial companies from hiring the best possible talent from around the world. Given the ATO’s ridiculous stance on taxing options at the time of award it is a major disincentive for talented IT workers from the US and Europe to come and work in this country. If the tax office actually took a few minutes to seriously think this issue through then they might just have a light-bulb moment and realise that if we taxed options at the time of realisation of their benefit then this would allow more companies to use them as a valid incentives structure and guess what – they might actually then collect more tax as a result.! Lets hope this review actually leads to some serious change. Through the prior IT Industry Innovation Council, which I was involved with, we suggested that improved options taxation arrangements should perhaps only apply to those SME companies which are eligible to claim the R&D Tax Incentive (i.e. engaged in serious R&D activities and under $20m in revenue) – I think this is still a good potential solution.
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