Employee share reforms will foster innovation

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ScreenHunter_4199 Sep. 15 09.24

By Leith van Onselen

The Australian has reported today that the Abbott Government intends to reform the way that employee share schemes are taxed in a bid to foster start-ups and innovation. From The Australian:

Employee share schemes will be a key part of [Coalition] policy by offering help to start-up companies that want to lure good staff with the offer of stock options. This is impossible for some under existing laws that require staff to pay tax on the shares when they receive them rather than when they sell them.

The share schemes will only be available to small companies, limiting the erosion of tax revenue…

Mr Hockey said employee share schemes became a “dog’s breakfast” under the previous Labor government, which changed the rules in 2009, a move that triggered strong protests from companies.

“They ripped the heart and soul out of employee share schemes and employee, not just share schemes, but employee ­incentive agreements and, in the interim, start-up businesses found it much easier to go offshore and start up in more agreeable locations than Australia,” Mr Hockey said. “We are absolutely determined to address those matters.”

While the devil will obviously be in the detail, the Coalition’s policy represents a big step forward.

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Under the former Rudd Labor Government, rules permitting employees to defer tax on shares or rights for up to 10 years were revoked in favour of an upfront tax charge, even when the value of the equity could not be realised or sold.

In the process, the former Labor Government effectively discouraged the development of start-up companies and innovation, since start-ups often cannot afford to pay employee salaries upfront and must instead offer equity.

Unlike Labor, the Coalition appears to acknowledge that start-ups are, by their very nature, highly risky. Therefore, it is unfair to charge tax on the face value of stock or options when the value may never be realised, or to create a tax system that reduces start-up’s ability to attract and retain staff.

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Let’s hope the Senate supports this measure, which is eminently sensible.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.