National accounting and advisory firm William Buck is calling on Treasury to end up front taxation of employee share options to stimulate more entrepreneurship and investment in business start-ups.
It is one of a raft of measures put forward by William Buck as part of the Federal Government’s review of employee share scheme taxation arrangements for start-up businesses.
William Buck Tax Director Greg Travers said the current rules hindered a start-up’s ability to use employee share schemes to attract and retain key staff.
“Start-ups can rarely afford the salaries that larger businesses can pay, however they can offer their employees a share of the “up-side” by giving them shares in the company,” he said.
“The current tax rules tax the employee on the value of the shares either when they are issued (upfront taxed plans) or at a specific time in future (deferred tax plans) with the maximum deferral being seven years.
“Often this results in an unfunded tax liability, where tax is payable on the value of the shares, even though the shares can’t be sold and the employee hasn’t received any cash.
“This is a problem for start-ups where it is not until a “liquidity event” like a trade sale, IPO or commercialisation of a product occurs that the shares have a realisable value.
“Where the taxing point arises before the employee can actually sell the shares, the employee will need to pay a tax liability but won’t have any cash from a sale of the shares to fund the pay. Putting an employee in this type of position undermines any motivational benefits that an employee share scheme could achieve.
“In the words of one of our clients, the current tax rules are a “barrier to innovation”. Long term this impacts on the strength of Australian’s entrepreneurial business culture.
“The issue of employee share ownership plans will be the first test of the Government to see if they’ll deliver innovation to Australia or simply swap one complex system and associated compliance costs with another.”
William Buck’s submission to Treasury calls for the following concessions to be put in place to encourage the use of employee share scheme arrangements by start-up businesses.
- A concession should be put in place that defers the tax on employee share schemes for start-ups until the shares are actually sold. This fixes the unfunded tax liability issue.
- The gain should be tax as a capital gain, recognising that it relates to the growth in the capital value of the business and has accumulated over many years.
- The concession should be available to Australian private companies with turnover of less than $20M (the same threshold as applies for the R&D refundable tax offset).
- The concession should apply to shares issued during a 10-year window. This way the concessions can be focused on start-up type businesses.
The concession should be easy to understand and implement so that the compliance costs associated with employee share schemes can be reduced. The need for formal valuations or detailed tax advice should be minimised.
To read our full submission please click here.
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William Buck is an association of independent firms, each trading under the name of William Buck across Australia and New Zealand with affiliated offices worldwide. Liability limited by a scheme approved under Professional Standards Legislation other than for acts or omissions of financial services licensees.
William Buck is an Associate member of Praxity, a global alliance of independent firms.