Deloitte proposes concrete startup employee share changes



news Corporate and technology consulting firm Deloitte has proposed a set of concrete definitions and rules that would substantially change the way the Australian Taxation Office deals with the contentious issue of employee share schemes for Australian startup companies.

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.

Late in January, the new Coalition Federal Government stated that it was “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. Any opening up of the scheme is likely to be welcomed by Australia’s IT startup sector.

In a statement issued this week associated with its submission to the Government’s review of the issue (PDF), Deloitte strongly argued that the current tax rules applied to employee share option plans (ESOPs) were disadvantaging Australian startup companies in the global war for talent and investor capital.

Rob Basker, Deloitte Tax partner and co-author of the submission, said: “On the first of July 2009 Australia took a backwards step in terms of providing the right tools for retaining and motivating talent that can drive an innovative and dynamic economy. That was the day that employee share scheme rules were changed and Australian employees became liable for income tax when share options were granted. The change meant the income tax liability fell on the employee, even if the shares were unable to be traded.”

Damien Tampling, technology, media and telecommunications partner and co-author of the submission said: “Our submission will not please all stakeholders in that it looks to initially only improve this situation for startup companies, but we believe that it is vital that some change is achieved rather than no change at all. We have considered the pressures faced by both startups and the Department of Treasury and delivered a proposal that will make employee share options fit for purpose again and ensure they deliver for the companies in Australia who need them most, startups with less than $15 million in revenue.”

“These companies are cash flow constrained and turn to equity in order to attract and reward key employees who could be the difference between success and failure in commercialising a concept.

“In Australia, 81 per cent of those surveyed by Deloitte (in January-February 2013), agreed that tax reasons were the main consideration for their reluctance to utilise ESOPs. Seventy-five per cent of those reluctant to utilise ESOPs, went on to say that ‘to a great extent’ the complexity of establishing the plans was a further disincentive to issuing share options,” said Tampling.

The Deloitte submission is based on research amongst the Australian startup community and the insights from our technology and tax specialists who advise businesses and investors in the area.

Having considered a number of alternatives and variations, the new model for a tax qualified ESOP for startups proposed by Deloitte addresses the following:

  • What qualifies? Deloite defines a startup as “an Australian-based business with consolidated revenue of $15 million per annum or less and providing (new) products or services for no more than ten years in Australia”
  • >Who qualifies? An employee with a taxable income of no more than $180,000
  • How long until the options qualify? Share options are to be held for at least two years from the grant of the option and shares acquired on exercise of the options are to be held for a minimum of 12 months to qualify for the capital gains tax discount
  • How are employees taxed on any gain? At the time of an event such as a private sale or initial public offering an individual would be subject to income tax at their marginal rate on the first $50,000 of any gain. Income tax at 15 percent would be levied between $50,000 and $180,000 and capital gains at a maximum 23.25 percent tax rate on gains above $180,000 in line with current CGT tax discount rules.

Basker said: “It is encouraging that the Government is looking into this issue as a matter of urgency and we are keen to be part of the solution, which is why we developed the taxation model outlined in our submission. If it is considered not enough, then it is important this feedback is gathered from those affected”.

Deloitte has launched a new website where the firm is attempting to engage the public to for further input on the issue and any changes they would propose to help refine a workable, yet still valuable solution. “One thing that everyone seems to agree on is that employee share schemes are broken under current legislation, but it’s now time we moved from beyond the problem to helping Government formulate a solution,” concluded Tampling.

Deloitte’s proposed changes appear reasonable enough to me, although I might quibble a little with the definition of a startup being up to ten years. In any event, I highly agree with Tampling’s closing statement that everyone agrees that something needs to be done, but that nobody is quite sure what yet. Deloitte’s suggestions represent the first concrete suggestions I have seen to deal with this issue. Let’s hope the Government can move forward on this one quickly.

Image credit: Matt Aiello, royalty free


  1. Yep the changes were brutal. Being forced to pay income tax on income you hadn’t yet really generated (doubly brutal when the share price halves between issuing and when you pay tax). And no it isn’t just rich CxOs whom are affected, a lot of companies issue shares to normal employees as part of their incentive schemes.

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