Deloitte recommends changes to tax rules to make share schemes easier for start-ups

Consulting firm Deloitte has called for shares issued under employee share schemes for start-ups to be taxed at the time they are sold or disposed of and tax concessions only be made available to employees earning less than $180,000 when they acquired the options.

Deloitte has made a submission to the federal Treasury’s consultation on employee share schemes and their impact on start-ups, which closed on February 7.

Eight roundtable meetings with nearly 90 stakeholders were held has part of the consultation process.

The tax treatment of employee share schemes has been widely criticised for impeding the ability of start-ups to attract and hire talent in the early days of their businesses.

Under the current scheme, share options are taxed when they are awarded, rather than later when they may be sold.

Deloitte says in its submission that its start-up clients “find it difficult to navigate through the increasingly rough waters of the current Employee Share Option Plan (ESOP) administration and taxation arrangements so that they can engage talented people (locally and from overseas) while optimising capital structures and efficiently managing cashflows”.

“Deloitte believes that innovation is vital to Australia,” it says.

“We agree that attracting, retaining and motivating skilled and experienced talent is vital for startups to grow and become globally competitive.”

Deloitte referred to its recent Barriers to Innovation survey, which combined with other surveys showed that if 95% of participants say they feel it is important to offer an ESOP to attract talent, but 63% don’t have one, “the current rules are ineffective”.

The firm has also suggested that start-ups be defined as “an Australian-based business with consolidated revenue of $15 million per annum or less and providing (new) products or services for no more than ten years in Australia”.

Deloitte also recommends simplifying the valuation methodology of ESOPs to reduce the cost of establishing and maintaining a scheme, amend tax laws to tailor ESOP tax rules more closely to the unique circumstances of start-ups, and standardise documentation.

“We believe that our proposed solution is flexible and simple for startups to implement and administer, meets the need for ESOPs to incentivise employees, and references international ESOP schemes for competitiveness, while utilising a large proportion of the current ESOP legislation and infrastructure,” it says.