Frydenberg announces employee share scheme reform — what does it mean for Aussie startups?

Tomorrow’s federal budget will reportedly introduce yet more changes to employee share scheme regulation, levelling the playing field for Aussie tech companies, and making it that bit easier for them to attract talent.

Importantly, the changes will reportedly be rolled into the Budget Measures Bill, meaning they will be passed into law before the impending federal election.

The reforms will “expand the availability of employee share schemes to more companies and employees, and allow employees to benefit from a larger share of the business’ growth”, Treasurer Josh Frydenberg reportedly said.

However, while widely welcomed by the tech community, some of the ‘new’ measures have been in the pipeline for some time already.

What’s new in employee share schemes?

In last year’s budget, the government committed to a review of legislation around employee share schemes, and announced measures to remove automatic taxation of holdings when an employee leaves a company.

While this taxation point is being touted as a measure in this year’s budget, legislation on the change was tabled in November 2021, and passed through Parliament in February 2022.

The government is now also reportedly removing the cap on the number of shares or options that can be issued, and increasing the value cap of shares from $5000 to a monetary cap of $30,000 per year — another measure first suggested in last year’s budget papers.

The monetary cap will reportedly not apply in the case of the sale of the business, or an IPO.

Frydenberg is also expected to announce that shares and options issued by local companies will now be treated the same way as those issued by those domiciled overseas, for tax purposes.

In a statement, Peter Dunne, general counsel at SafetyCulture and head of venture capital at law firm Herbert Smith Freehills, said this change “removes an anomaly that placed Australian companies at a disadvantage to foreign entities”.

The difference is that, while last year’s budget promised reform and sparked a string of reports, recommendations and consultations, the fact that these changes will be in the Budget Measures Bill means we can expect them to come into effect from July, offering some much-needed clarity — and action — for the tech sector.

How do employee share schemes benefit startups?

These changes come after years of debate, reports, recommendations and consultations, starting back in 2018, when Frydenberg and then-minister for small and family business Michaelia Cash suggested the framework was discouraging to businesses.

In a statement, Kate Pounder, chief executive of the Tech Council of Australia, said this is “vital reform”, and a welcome sign that the government is focused on improving the regulatory framework around employee share schemes.

The changes will benefit up-and-coming Aussie startups, in particular, she said, making it easier for employees to participate in share schemes, and for employers to attract and reward talent.

“This creates a virtuous cycle that accelerates the creation of new jobs and new companies,” Pounder explained.

“Employees that benefit from such schemes are more likely to leave and found their own company with share proceeds, and therefore create more new jobs and successful Australian companies.”

Until recently, Australia was one of the only countries that taxed employees when they left a company, on shares they were often not able to sell, noted Noel Allnutt, managing director of cybersecurity and digital resilience startup Sekuro.

The changes announced in last year’s budget “weren’t revolutionary”, he added.

“They were necessary to establish an environment in which local businesses can compete for talent, grow to contribute to the local economy, and scale internationally.”

For Allnut, allowing tech companies to create more attractive workplaces and offer competitive remuneration packages is a key element in addressing talent shortages in Aussie tech.

“With the right policies in place, we can finally compete on a level field for international talent.”