Employee share scheme rules to be relaxed in National Competitiveness Agenda targeted at SMEs

Tax rules for employee share schemes will be relaxed, startups will be allowed to avoid tax when offering staff discounted shares in their companies, and SMEs will have access to funding to help them employ specialist consultants as part of the federal government’s National Industry Investment and Competitiveness Agenda.

Details are already emerging of what will be included in the agenda, which is due to be unveiled by Industry Minister Ian Macfarlane tomorrow.

SmartCompany understands reform to employee share schemes is one of the key planks of the agenda, which is designed to boost innovation and break down barriers to investment in Australian companies.

The changes to the employee share scheme will effectively reverse the policy introduced by the Labor government in 2009, with employee options to be taxed only when they are converted to shares, as opposed to when the employee receives the options.

The changes will apply to all companies, while some eligible startups will also be able to offer shares or options to employees at discounted rates without having to pay tax upfront.

Established SMEs are also set to benefit from the agenda, with News Corp reporting this morning the policy will include funding for SMEs wanting to hire specialist consultants or to test the viability of a concept.

The Department of Industry is also expected to launch a database of SMEs targeted at anyone looking for a product or service.

The agenda is also expected to include measures to support companies to commercialise their innovations by streamlining regulatory approvals for some products, as well as additional information about the Entrepreneur’s Infrastructure Fund announced in the May budget.

Small Business Minister Bruce Billson has previously told SmartCompany rolling back Labor’s employee share scheme rules is a priority for him.

 “We’ve seen those changes act as an enormous disincentive for enterprising people,” said Billson.

Dominic Woolrych, legal product manager at LawPath, told SmartCompany this morning LawPath works with many Australian SMEs and startups to develop employee share schemes and therefore welcomes any changes that will “bring down costs and complexity”.

Woolrych says it can cost a company more than $10,000 to establish its employee share program, with much of the funds spent on legal fees.

While the time it takes a company to nut-out their share scheme plan will depend on how many employees it has and the type of scheme it opts for, Woolrych says a startup can expect to spend a month working out the details.

“But because it is so complex, a startup often finds itself spending a lot of time with lawyers,” he says.

Woolrych says he understands the government’s policy will “mirror the scheme over in England at the moment”, in which the shares or options are taxed once they have been converted to shares, and there will still be thresholds.

“Which is good as well,” he says. “In 2009, when the new rules came in they were designed to stop high-level executives using the schemes to hide shares … we still need thresholds.”