For most start-ups, capital is rarely found in abundance. Hence, entrepreneurs must be creative in finding ways to incentivise their workforce when large pay-cheques and bonuses simply aren’t an option.
In a bid to artificially boost Australia’s burgeoning start-up community – and assist those cash-strapped entrepreneurs – the Federal government has proposed a number of amendments to taxation and superannuation laws, set to take effect from 1 July 2015.
One component of those amendments is the Employee Share Scheme (‘ESS’), which gives entrepreneurs the chance to harness the power of equity by offering employees discounted company shares, or rights to shares, in lieu of higher salaries. The federal government anticipates that such concessions will stimulate the growth of innovative start-ups in Australia. This has been supported by Jonathan Teo, a leading US investor, who believes tax concessions will help nurture Australia’s start-up ecosystem, and encourage talented employees to take a more positive “equity mindset”.
This alternative remuneration model benefits start-ups in a number of ways. Firstly, it releases capital to reinvest back into the company, by reducing outgoing salaries and bonuses. Secondly, it allows employers to compensate or reward employees with prospects for long-term financial gain. And thirdly, it encourages employees to take a personal financial stake in the company’s future, widely understood to increase employee productivity.
Proposed laws governing ‘small start-up concessions’
The abovementioned ‘Exposure Draft’ details the possible amendments to the Income Tax Assessment Act 1997. Most relevant to start-up enterprises are the sections summarised below.
- Section 83A-33: If the ESS and employer meet various conditions (see below), the proposed start-up concession provides that an employee need not declare a discount on ESS interests acquired in their tax-assessable income.
- Section 83A-30(2): In relation to shares: the discount on issue of the ESS is exempt from income tax, and the share, once acquired, is then subject to capital gains tax.
- Section 130-80(4): In relation to rights (that is, the right to buy shares at a later date): the discount is not taxed upfront, but the share, once acquired, is subject to capital gains tax, with a cost base equal to the employee’s cost of acquiring the right.
The conditions that regulate which employers may take advantage of the start-up tax concessions include (but are not limited to):
- Start-up must be an Australian resident company;
- No equity interests can be listed on the stock exchange;
- Start-up must have been incorporated for less than 10 years;
- Start-up must have an aggregated turnover not exceeding $50 million;
- Where the ESS is a beneficial interest in a share, the discount on the ESS interest is less than 15% of its market value when you acquire it; or, where the ESS is a beneficial interest in a right, the amount payable to exercise the right is greater than or equal to the market value of an ordinary share in the company when you acquire the ESS interest;
- ESS relates to ordinary shares only;
- Comply with relevant minimum holding periods; and
- A 10% limit on shareholding and voting power.
If you believe your start-up satisfies these conditions, you may be on the right track to implementing a successful ESS come 1 July 2015. However, as the proposed changes suggest a raft of other conditions, as well as new methods of quantifying ESS interests, such as ‘safe harbour valuation’ methodologies, it will be important to seek professional legal advice prior to taking any action.
Understanding and ultimately harnessing these proposed tax amendments will be essential for Australian start-ups seeking to maintain a competitive edge in the international marketplace. It will also be crucial in helping those fledgling companies attract and retain their most valuable commodity: talented employees.
 Tax and Superannuation Laws Amendment Bill 2015: Improvements to the Taxation of Employee Share Schemes (Explanatory Materials), beginning at 1.5. Available at: http://treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2015/Improvements%20to%20the%20taxation%20of%20employee%20share%20schemes/Key%20Documents/PDF/Explanatory_mat_improvements.ashx (last accessed: 20 March ‘15).
 Nassim Khader, ‘Start-up nation: Australia needs specialisation and tax breaks, says leading US investor Jonathan Teo’, BRW (28 Oct ‘15), http://www.brw.com.au/p/entrepreneurs/start_leading_nation_australia_needs_Tjal2sjQy15rqqBCFzeQ0I (last accessed: 19 March ‘15).
 Id., Tax and Superannuation Laws Amendment Bill 2015, beginning at 1.63.
 Id., Tax and Superannuation Laws Amendment Bill 2015, beginning at 1.67.