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Deloitte proposes employee share scheme changes for startups


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12 February 2014: According to Deloitte, the current tax rules applied to employee share option plans (ESOPs) are disadvantaging Australian startup companies in the global war for talent and investor capital. This week, Deloitte is releasing a new submission to the federal Treasurer and Department of Industry, which provides a number of recommendations including an improved taxation model that if adopted, would increase ESOP adoption and minimise potential for misuse.

Employee Share Option Plans are widely regarded as a way for fast-growing companies, typically short of revenue and capital, to incentivise employees by providing them with shares in the business.

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

In a response to the Government’s discussion paper, Employee Share Schemes and Start-up  Companies: Administration and Taxation Arrangements, 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? A startup defined 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.

Mr 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 retainingtalent.com.au where we are engaging 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 beyond the problem to helping Government formulate a solution”, concluded Tampling.
NB: See our media releases and research at www.deloitte.com.au

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Contacts

Name:
Rob Basker
Company:
Deloitte Australia
Job Title:
Partner, Tax
Phone:
Tel: +61 2 9322 7551
Email
rbasker@deloitte.com.au
Name:
Damien Tampling
Company:
Deloitte Australia
Job Title:
Partner, Corporate Finance
Phone:
Tel: +61 2 9322 5890, Mobile: +61 409 100 905
Email
dtampling@deloitte.com.au
Name:
Johnny Sollitt-Davis
Company:
Deloitte Australia
Job Title:
Corporate Affairs & Communications
Phone:
Tel: +61 2 9322 7256, Mobile: 0431 134 850
Email
jsollittdavis@deloitte.com.au

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