The government will be revoking changes to the 2009 employee share schemes tax regime. DLA Piper partner Brett Feltham explains what this will mean for employers.
News that the Abbott Government will be revoking changes to the 2009 employee share schemes tax regime will be welcomed by employers and employees.
However, there are numerous obstacles still facing the successful implementation of schemes according to DLA Piper partner, Brett Feltham.
"Implementing employee share schemes involves ensuring compliance with laws in a number of different areas, including securities laws, employment laws and tax," he said. "The existing rules can create confusion for employers and employees alike in relation to the type of award which should be offered and the terms which should apply to that award, and if not properly understood and complied with, may trigger counter-productive tax and legal outcomes."
It has been estimated that up to 400,000 employees who own shares in the companies they work for are set to be better off under a relaxation of the tax rules. In addition, the Employee Ownership Australia and New Zealand Group estimates changes to the rules could boost Australian GDP by AU$1.4 billion over a decade, and in the short term, the government could collect an extra AU$200 million a year in tax revenue from extra employee-driven investment.
The 2009 tax changes to employee share schemes resulted in most option plans becoming taxable at vesting (rather than when options are exercised) which meant that the use of option plans dramatically declined post 2009 for many start-up or resources sector companies.
Pre 2009, 85% of startup/growth sector companies used option plans compared to six percent post 2009. Salary and bonus sacrifice based plans also largely disappeared from the market as a result of those changes.
Many companies initially suspended some or all of their plans while they sought clarity on how the changes would operate, and many companies simply found the new rules too difficult to navigate and discontinued use of their plans.
"Employee share schemes can serve as an effective talent retention tool and remuneration mechanism to incentivise high performing employees," said Feltham. "They are also particularly important for start-up companies, which are often unable to reward their employees with high salaries and cash bonuses because of their initial, limited cash flow.
"For those companies in particular, the potential for individuals to be easily offered a share in the company will be the difference between hiring and retaining the right talent to drive the company's success and losing those individuals to competitive (and potentially overseas) companies who can offer that potential upside. To be able to do so in an efficient way, will ultimately lead to greater competiveness and innovation."
In August 2013 the Federal Government released the discussion paper Employee Share Schemes and Start-up Companies: Administrative and Taxation Arrangements, and announced that it would review the tax rules which applied to those companies in consultation with key stakeholders.
A number of potential reforms were considered in the Federal Government's paper, and during the consultation process, including:
• allowing different tax treatment (with some concessions) for equity granted by start-up companies under an employee share scheme, with four possible tax treatments discussed;
• introducing a definition of "start-up company", which has been generally been criticised by experts as limiting the effectiveness of any reforms; and
• implementing measures to reduce the complexities and costs of structuring and operating employee share schemes for start-up companies to help them be more internationally competitive.
Measures that were discussed included simplifying the valuation methodology of unlisted equity issued by start-up companies under such schemes, and developing standardised documentation for a basic scheme.
"Despite it being anticipated that the recent Federal Budget could include an announcement of the reforms focussed on start-up companies, no such announcement was made. It remains to be seen whether reforms of this type will be introduced specifically for start-up companies, or whether the potential tax changes being discussed will sweep aside the need for any specific reforms for these companies," Feltham added.
However, there are numerous obstacles still facing the successful implementation of schemes according to DLA Piper partner, Brett Feltham.
"Implementing employee share schemes involves ensuring compliance with laws in a number of different areas, including securities laws, employment laws and tax," he said. "The existing rules can create confusion for employers and employees alike in relation to the type of award which should be offered and the terms which should apply to that award, and if not properly understood and complied with, may trigger counter-productive tax and legal outcomes."
It has been estimated that up to 400,000 employees who own shares in the companies they work for are set to be better off under a relaxation of the tax rules. In addition, the Employee Ownership Australia and New Zealand Group estimates changes to the rules could boost Australian GDP by AU$1.4 billion over a decade, and in the short term, the government could collect an extra AU$200 million a year in tax revenue from extra employee-driven investment.
The 2009 tax changes to employee share schemes resulted in most option plans becoming taxable at vesting (rather than when options are exercised) which meant that the use of option plans dramatically declined post 2009 for many start-up or resources sector companies.
Pre 2009, 85% of startup/growth sector companies used option plans compared to six percent post 2009. Salary and bonus sacrifice based plans also largely disappeared from the market as a result of those changes.
Many companies initially suspended some or all of their plans while they sought clarity on how the changes would operate, and many companies simply found the new rules too difficult to navigate and discontinued use of their plans.
"Employee share schemes can serve as an effective talent retention tool and remuneration mechanism to incentivise high performing employees," said Feltham. "They are also particularly important for start-up companies, which are often unable to reward their employees with high salaries and cash bonuses because of their initial, limited cash flow.
"For those companies in particular, the potential for individuals to be easily offered a share in the company will be the difference between hiring and retaining the right talent to drive the company's success and losing those individuals to competitive (and potentially overseas) companies who can offer that potential upside. To be able to do so in an efficient way, will ultimately lead to greater competiveness and innovation."
In August 2013 the Federal Government released the discussion paper Employee Share Schemes and Start-up Companies: Administrative and Taxation Arrangements, and announced that it would review the tax rules which applied to those companies in consultation with key stakeholders.
A number of potential reforms were considered in the Federal Government's paper, and during the consultation process, including:
• allowing different tax treatment (with some concessions) for equity granted by start-up companies under an employee share scheme, with four possible tax treatments discussed;
• introducing a definition of "start-up company", which has been generally been criticised by experts as limiting the effectiveness of any reforms; and
• implementing measures to reduce the complexities and costs of structuring and operating employee share schemes for start-up companies to help them be more internationally competitive.
Measures that were discussed included simplifying the valuation methodology of unlisted equity issued by start-up companies under such schemes, and developing standardised documentation for a basic scheme.
"Despite it being anticipated that the recent Federal Budget could include an announcement of the reforms focussed on start-up companies, no such announcement was made. It remains to be seen whether reforms of this type will be introduced specifically for start-up companies, or whether the potential tax changes being discussed will sweep aside the need for any specific reforms for these companies," Feltham added.
