Taxation, start-ups and employee share schemes

Bartier Perry has responded to the Federal Government’s Discussion Paper of August 2013 regarding Employee Share Schemes and Start-up Companies: Administrative and Taxation Arrangements.  

The Federal Government announced this year that it would consult with stakeholders to determine the most effective measures to address the barriers faced by Australian start-up companies, in particular ways to lessen the current taxation and administrative burdens in respect to employee share schemes (ESSs).

Bartier Perry has a client base in the start-up and early stages of the business growth cycle providing advice and support to these clients.  One of the major issues facing entrepreneurs is attracting and retaining employees, during setup and early growth, when they are unable to match the salaries and other benefits shared by more mature enterprises.

Bartier Perry believes obvious advantages to the Australian economy of retaining talent, particularly in the technology sector, are lost through the complexities of the current tax regime.  The drain of Australian talent to overseas could be reduced by matching the US and UK in the ease of setting up and understanding ESSs.

Of significant concern with the current regime is that, in the vast majority of cases, tax is payable by the employee even though there is no market for the shares and the employee has not received any income or economic gain from the shares.

In our response, we propose that the taxing point and payment of tax should occur when the employee’s shares are sold and a capital gain is made.  This recognises the risk the employee has taken in accepting shares under an ESS, and taxes them at the point when they are in a better position to pay.

We suggest that any review of the impact of current tax and administrative on EESs should be combined with a review of the application of the Corporations Act to ESSs set up by start-up companies.  

Bartier Perry’s view:

• An employee or consultant receiving an interest in shares in a start-up should only be taxed when a capital gain is made on the disposal of the interest. 

• The definition of start-up should be extended to align with the UK requirements for an Enterprise Management Scheme.

• Pro forma tax advice and relevant legal documentation should be made available to start-ups.

• A review of the application of the Corporations Act to ESSs established by start-up companies should also be  undertaken  in conjunction with any tax reforms.