Australia revises employee share scheme law

The current system - whereby tax must be paid on options up front - has been likened to levying a tax on every person who buys a lottery ticket just in case they win. It has also been blamed for encouraging entrepreneurs to avoid Australia and set up businesses in jurisdictions where the tax treatment is more favorable.

The Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, which was introduced on March 25, reverses the 2009 decision to reclassify options as income and therefore tax them at the employee's marginal rate. This was intended to prevent highly-paid executives from minimizing their tax exposure, but employees of start-ups who were awarded options in lieu of cash because their employers had yet to start generating significant revenues, were drawn into the nexus.

In addition to changing the taxation point for options from when they can be exercised to when they are exercised, the bill increases the maximum deferral period from seven to 15 years, and promises additional tax concessions where share options are offered to employees at a discount and are held for at least three years. The Australian Tax Office will also work on streamlining the process of establishing and maintaining an employee share scheme (ESS).

To qualify for the scheme, a start-up employee must hold no more than 10% of the company, compared to 5% under the old system. The company itself must also be unlisted and have generated income of less than A$50 million ($39 million) the year before the ESS interest was acquired.

The changes come into force on July 1 and apply to ESS interests acquired on or after this date.

Yasser El-Ansary, CEO of the Australian Private Equity & Venture Capital Association (AVCAL) praised the introduction of the bill, noting that the tax treatment of ESS "has been a major handbrake on Australia's start-up sector" for almost six years.

"There have been countless stories of home-grown Australian entrepreneurs packing their bags and relocating overseas because our tax rules in this area have been such a problem - especially when other countries around the world are going to great lengths to lure our entrepreneurs offshore through more favorable tax incentives and straightforward compliance regimes," he said.

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