The Federal Government released on Friday, 2nd August 2013 the discussion paper Employee Share Schemes and Start-up Companies: Administrative and Taxation Arrangements. A copy of the Ministers press release on this can be seen here.
Already there has been a flurry of activity and initial views on the discussion paper, including PwC’s useful overview.
There are some key guiding principles that any reform should take:
- A recognition that start-ups are imperative for Australian economic growth specifically for our country’s innovation and productivity. Starts ups are likely to contribute $109 billion and 540,000 jobs to the Australian economy by 2033;
- Any review should be comprehensive and place Australia in a competitive position globally. So that Australia is on a level playing field with the US and the UK. This means that any tax provisions should be on par with the philosophy globally that employees of start-ups are largely rewarded through employee share scheme arrangements which are not taxed until a realisation event occurs;
- Start-ups globally predominantly use options rather than shares because of their simplicity for companies and employees, the low down side risk to employees and the potential for upside that such plans deliver where a company is eventually successful. Any regime should prioritise option plans;
- Any changes should ensure that they do not impose greater complexity and burden on companies that do not have the cash flow to pay for advice around complex legislation or tax arrangements. The philosophy underpinning the changes should be simplicity and ease of use;
- The valuation is an ongoing issue that adds costs. The changes have eased this issue but this could be further simplified by minimising the points at which a valuation is needed for tax purposes and aligning the value of options with the market value of the shares less exercise costs rather than a more complex Black Scholes/binominal method currently in the tax tables;
- Any definition of start-ups should be simple and indicative of the actual market. A Good example of this is the R&D definition that is easily understood and clear. The current definition is too limited in terms of employee numbers,
- Any regulatory reform on tax should happen in conjunction with other reforms around the Corporations Act, e.g prospectus filing requirements.
EOA will be providing a formal response to the paper and encourages people to provide their views and input to the discussions.
