Would paying your staff in equity, rather than a salary, during your start-up phase help you meet your business goals? Would providing staff a mix of salary and equity allow you to hire more employees during start-up phase? Employee Share Schemes are popular among start-ups, as they allow employees to acquire shares in the company, often at a discount, as part of their pay package. They have been a popular way for technology entrepreneurs to grow their companies. Notable examples include Facebook and Google in the United States. But in Australia this option was taken off the table by legislation in 2009, which introduced an upfront tax on shares issued to employees. This meant shares were taxed when they were provided to the employee.
Of course, in the early years of a start-up there is no way of determining the shares’ value, so employees were left with a substantial tax liability, without the salary and therefore capacity, to pay. While originally intended to stop high wealth individuals minimising their tax through share options, the 2009 decision resulted in many employee share schemes collapsing after employees received tax bills on shares yet to be realised.
As promised, as part of the federal government’s Industry Innovation Agenda, released last October, the Minister for Small Business, Bruce Billson has released draft legislation this month to overturn the policy. The government’s proposed amendments will mean tax on the options is paid when there is an actual material value on those options. As well, the Government plans to allow eligible start-up companies to issue shares or options to their employees at a small discount. That discount will generally exempt from up-front taxation. To qualify, companies must be less than 10 years old, must not be in a corporate group of any older companies and must have had a turnover of less than $50 million in the previous year.
Once a company qualifies, its employees will be able to defer paying tax on share options until they sell the underlying shares, for up to 15 years. You can have your say on the draft legislation at the Treasury website. You can also provide feedback to the Australian Taxation Office, which has been tasked with streamlining the process of establishing and maintaining an Employee Share Scheme.
The Minister has said this legislation will increase the international competitiveness of the tax system and allow innovative Australian firms to attract and retain high quality employees in the globally competitive labour market. What do you think?
