Deloitte has submitted a proposal to the Treasury that would modify tax rules governing employee share options in Australia. The consultancy firm seeks to restore a key non-cash incentive for startups to attract and retain talent.
Treasury invited comment on the issue last month and has just completed two weeks of consultation with stakeholders on the issue in Sydney and Melbourne.
Changes to tax rules made under Labor in July 2009 discouraged Australian startups from providing share options to employees. They required that the employee is taxed on the value of the share option when it is issued, before any payments are made.
In other countries, the employee is not taxed until they execute the option. This is better for cash-poor early stage startups, which can use share options as an alternative to a larger salary.
“We’ve seen a lower number of startup companies actually get up and away because they can’t capitalise and organise themselves with what they need to sustain themselves,” said Damien Tampling, a Deloitte partner specialising in technology, media and telecom.
“You’ve got a higher number falling over because they run out of cash and they’ve got no other means by which to get people engaged and motivated.”
The problem is not the rate of tax but when an employee is liable for tax, said Deloitte Tax Services director, Rob Basker. “No one actually minds paying the tax,” Basker said.
The 2009 employee share options rule was originally intended to prevent big companies from issuing options to senior executives. It’s expected a major area of debate will be about how to define a startup in any amendment to the rules.
The Deloitte proposal defines a startup as “an Australian-based business with consolidated revenue of $15 million per annum or less and providing (new) products or services for no more than ten years in Australia.”
Deloitte's proposal would only apply to employees with a taxable income of $180,000 or less.
The share options would not qualify until they are held for at least two years from the grant of the option. Shares acquired on exercised of the options would be held for a minimum of 12 months to qualify for the capital gains tax discount.
At the time of an event like a private sale or initial public offering, an individual would be subject to income tax at their marginal rate on the first $50,000 of any gain. Income tax at 15 per cent would apply to $50,000 to $180,000 of gains. A maximum 23.25 per cent tax rate would apply to gains above $180,000, in line with current capital gains tax discount rules.
Basker said the Deloitte proposal would have only a small negative impact on tax revenue to the Treasury.
“Deloitte used the example of an individual earning a salary of $80,000 per annum and who receives $100,000 benefit from the exercise and sale of their [employee share option],” he said. “Putting aside the timing of tax events and tax collection, the overall tax difference was as little as $2000.
“On the basis the current review is limited to startups, this small leakage in tax of the proposed alternative should not have a widespread impact on Treasury modelling, and could ultimately be offset by increased tax revenue from startups.”
Basker emphasised that the Deloitte proposal is not set in stone, but should rather be seen as a starting point for more discussion.
“We just went, 'Why don’t we just come out with one and get the debate happening?'” he said.
“There’s always going to be winners and losers when you put a definition on the table, and there’s always going to be decisions made because of that definition,” Basker said.
Deloitte would rather change the share options scheme for companies of all sizes rather than just startups, the Deloitte officials said. But according to Basker, “There seems to be little appetite [in the government] for changing anything other than in the startup area.”
Tampling said the Deloitte proposal should be seen as a first step in a longer journey. “Some change is better than no change,” he said.
Next page: Support from industry, government