Employee share scheme changes “unashamedly” aimed at early stage startups

Early stage tech startups are the focus of changes to the employee share scheme legislation introduced into Parliament on Wednesday.

Small Business Minister Bruce Billson tabled the bill on Wednesday morning, saying the reforms will “restore and rebuild” startup incentives, which were taken away by the previous Labor government.

Speaking to StartupSmart after the second reading, Billson said an effective employee share scheme framework is an important ingredient to any healthy economy.

“There has been a consistent and loud chorus calling for change,” he said.

“The incoming government recognised that and we’ve set out not only to correct the harm of those 2009 changes, but stepping forward with new concessions to bolster support and engagement for employee share schemes.”

The changes

• Companies and employees who are issued with options will generally be able to defer tax until they exercise the options (convert the options to shares), rather than having to pay tax when those options vest.

• Eligible startups will be able to issue options or shares to their employees at a small discount, and have that discount exempt (for shares) or further deferred (for options) from income tax.

• The maximum time for tax deferral will be extended from seven to 15 years.

• The maximum individual ownership limit for accessing employee share scheme tax concessions will be increased from 5% to 10%.

• Eligible startups need to have an annual turnover of less than $50 million.

• In the event a startup raises venture capital, that will not affect the eligibility threshold.

• If a startup is acquired before it has operated for three years, its original shareholders will still get their 15% tax deduction on the sale of the shares.

Billson says the changes are on track to come into effect in the new financial year.

“I’ve had encouraging early responses with opposition members and I’m optimistic that will all be implemented as per a tight and demanding timetable which is exactly what the startup industry were calling for,” he said.

StartupSmart understands there is support from within the Labor party to overhaul the current rules governing employee share schemes.

The legislation tabled in parliament today not only allows employees at eligible startups to receive tax concessions, but also ensures the regulatory burden faced by young tech companies is significantly reduced.

Billson says there will be “good-to-go template tools and documents” from the ATO available to help businesses wanting to set up an employee share scheme.

Reuben Bramanathan, senior lawyer at Adroit Lawyers, told StartupSmart there were some “key issues” with the draft bill that have carried over to its current form.

“If an employee resigns from a company on good terms, and they keep their vested shares, they still have to pay income tax at that time,” he said.

“This taxing point applies even if they are unable to sell the shares at that point, for example, due to lockup restrictions in the shareholders’ agreement.”

Billson says this was identified as an issue during the consultation process.

“This was an issue that came up and we consulted quite widely on that as we knew it was an issue of some interest,” he said.

“We extended the tax refund provision to cover situations where an employee is forced to pay when those options lapse or cancel. That’s what we’ve sought to do to alleviate that concern.”

Another part of the legislation that has been criticised is the exemption for startups turning over more than $50 million, as well as companies listed on the ASX. That means companies like Atlassian and Freelancer will not be able to access the scheme.

However Billson defended this, saying issues around employee share schemes “most visibly” affect smaller players.

“It’s unashamedly focused on startups and smaller enterprises,” he said.

“We’ve got to work within a frugal budget climate, therefore we’ve had to target these measures where they can best make a difference.”

Atlassian co-founder Mike Cannon-Brookes has criticised that position, telling SmartCompany last month it’s a bit like saying Facebook and Google don’t need to give employee share options “which I think they would disagree with”.

The new employee share scheme rules are due to come into effect on July 1 should they pass both houses of parliament.

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