Review finds employee share scheme changes are hurting start ups, but improvements put in ‘too hard’ basket

The Government has ruled out changes to its employee share scheme laws to assist start ups and small businesses, despite a Board of Taxation review finding shares and options are a crucial way for small firms to attract and retain talent.

The Federal Government asked the Board of Taxation to review the impact on small firms from the Government’s controversial changes to the way employee share schemes are taxed, which were announced in the 2009 Federal Budget.

The changes, which were heavily criticised and subsequently revised by the Government, meant employees who received shares or options would need to pay tax upfront if they earned over $180,000.

But the venture capital and small business community remain unhappy with the rules, arguing that shares and options are crucial tools to attract staff in cash-poor start up companies and R&D firms.

The Board of Taxation largely agreed with that position, acknowledging “claims that generally start up, R&D and speculative type companies tend to place a particular reliance on offering their key employees equity remuneration due to their cash-strapped status”.

However, the Board rejected proposals from the Australian Venture Capital Association that small businesses and start ups should be given exemption from the employee share scheme rules.

“The Board considers that due to the largely disparate nature of these types of companies there is a fundamental difficulty in attempting to define which entities should be eligible to access any relaxed restrictions. The Board considers that in light of the significant integrity concerns to the operation of the employee share scheme provisions created by the inability to adequately ring-fence eligibility, any relaxation of the current restrictions is not a viable alternative.”

“Therefore, it is the Board’s view that any additional support for start up, R&D and speculative-type companies would be better provided by Government through support mechanisms such as programs administered by Commercialisation Australia and the new R&D tax incentive which can be better targeted than any further tax concession.”

Assistant Treasurer Nick Sherry said in a statement that the Government will continue with its model of direct industry support, rather than some sort of exemption from the employee share scheme tax rules.

ACVAL chief executive Katherine Woodthorpe says she is “surprised and disappointed” by the Board’s decision and particularly its rejection of the organisation’s idea that exemption from the employee share scheme rules could be given to those companies that are eligible for the Government’s R&D tax credit, which is available to firms with less than $20 million in turnover.

“We felt that you could align that beautifully – if you were eligible for the R&D tax credit, then you would be eligible for the exemption,” she says.

Woodthorpe fears the employee share scheme will hurt Australia’s R&D sector in two ways.

Firstly, it will make it harder for Australian companies to attract talent from overseas, where executives are used to receiving a large part of their remuneration in the form of shares and options where R&D companies cannot pay cash.

“Bringing people from overseas to add to the gene pool in Australia will be harder. These shares and options are compensation for remuneration – they are not fat bonuses for bankers.”

Secondly, she says entrepreneurs may be discouraged from setting up companies at all. If a group of entrepreneurs start a company and then raise money by selling shares, their own shares will have a valued attached to them.

“At that point they run the risk of getting a tax bill even though the shares aren’t worth anything.”

Woodthorpe says she plans to respond formally to the Board’s report and make her organisation’s disappointment known to the Government.