Federal Government's review of employee share schemes can't come soon enough: start-ups
Start-ups are keen to offer US-style employee share options as soon as possible. Photo: Jessica Hromas
Australia's technology start-ups say they've become "collateral damage" following a shake up of federal portfolios they feel has left them out in the cold when decisions affecting the industry are made.
Entrepreneur and start-up mentor Matt Barrie, who is taking his Freelancer.com crowdsourcing website public, said the Coalition Goverment's lack of innovation focus has cruelled Australia's start-up industry. Employee share schemes - known also as employee share option plans (ESOP) - are a particular pain point for start-ups, who prefer to offer ownership to founding staff in place of higher salaries.
While these shares have no market value in the early days of a start-up, under the current regime they are still subject to tax payments that either the employee can't pay or the business can't afford to loan them.
"In our prospectus there's not just a general offer, there's an employee offer and we had to draft all this ridiculous stuff so we have to loan millions of dollars to staff to own any shares," Barrie said.
"You have staff who are working in a company who have to pay tax every single time there's a vesting point for their options, ahead of any time they might be worth anything.
"Both sides of government have said it's a primary issue they want to solve and I think it will be solved in next six months or so. But because no one in government is thinking of the technology industry actively as part of their day-to-day job we tend to be the collateral damage of other decisions that are going on."
Employee share schemes as regulated under the Income Tax Assessment Act were tightened in 2009 under the Gillard-Labor Government as a crackdown on rorting at the top end of the town to generate what was believed at the time to be an extra $100 million to $200 million a year in tax revenue. However, they hit start-ups hard.
Seth Yates, chief technology officer and founder of digital advertising start-up Brandscreen, said the inability to cheaply and easily offer shares to early employees is damaging his business.
"In Silicon Valley it's easy to get options that are tax-effective for staff and in Australia it's nearly impossible," Mr Yates said.Barrie and Yates were among a handful of start-ups including Roomz, Canva and Brandscreen speaking at a briefing organised by cloud provider Amazon Web Services in Sydney.
In the US, the schemes are colloquially known as "golden handcuffs" because they usually tie an employee to the company for a period of three to five years. Companies such as Google and Amazon have used employee share schemes extensively to recruit and retain talent and help them grow.
The Coalition Government has committed to continue the review of employee share schemes started under the Rudd Labor Government and a report is due in December. It is expected to recommend their reintroduction for start-ups subject to conditions.
Speaking at the launch of Telstra's Muru-D start-up accelerator in Sydney this week, communications minister Malcolm Turnbull said he was keen to see the rules reformed. The tax review comes under Treasury, however.
"Subject to affordability in these straitened times we all recognise that we need to have a tax system that should be operating in a manner that encourages start-ups to issue stock to employees in new businesses," Mr Turnbull said.
"If they make out like bandits at the end and make millions of dollars, then they can pay tax then, but you don't want a disincentive at the outset."