The government has launched another inquiry into employee share schemes after its previously announced changes to the popular initiative stalled.
Treasurer Josh Frydenberg last month referred the issue of the tax treatment of Employee Share Schemes (ESS) to the Standing Committee on Tax and Revenue.
In late 2018 Mr Frydenberg announced a number of planned changes to the scheme, including raising the cap from $5000 per employee to $10,000 per employee, and further exempting startups and small businesses from reporting requirements and disclosures.
But the changes were never legislated, despite Treasury running public consultations on the proposals last year.
The new inquiry will look at the effectiveness of the changes made to ESS in 2015, along with the “challenges faced by companies in setting up an ESS arrangement and how taxation treatment affects the structure of current ESS arrangements”.
The inquiry’s terms of reference include:
- how well the current Employee Share Scheme has been in its “goal of bolstering entrepreneurship in Australia and supporting startup companies”
- the cost and benefit of the concessional taxation treatments
- whether the current tax treatment of the scheme remains “relevant to startup companies and whether any changes are appropriate to ensure the taxation treatment remains relevant”
- the challenges faced when setting up a share scheme
Liberal MP Jason Falinksi, who is chairing the inquiry, said flaws in the current scheme may be contributing to tech companies moving overseas.
“Employee share schemes greatly support entrepreneurship and innovation while encouraging employee loyalty. Australia’s experience with such schemes has been chequered,” Mr Falinksi said.
“It is no coincidence that the few commercially successful technology companies Australia has produced, like Palantir and Atlassian, have ended up moving a lot of their operations to the US and listing there because the United States is the home of employee share schemes.”
The committee will accept submissions on these issues until 19 March.
The new inquiry is a “positive” and the case for significant reform around the ESS is “exceptionally strong”, Australian Investment Council chief executive Yasser El-Ansary said.
“An inquiry like this creates another opportunity to open up the conversation about how the regime is working and what we can do to continue to advance our regime in a way that ensures Australia remains competitive with markets around the world,” Mr El-Ansary told InnovationAus.
“Australia is clearly in a competitive race for talent and for labour, and in a global race for innovation, and so those things together mean we must continue to improve our program.,” he said.
“The reality is that the current state of the regime today is a reflection of the fact that we need to address the mistakes that were made many years ago.
“This is a really good opportunity for the government to now move forward with meaningful reforms that would have a net positive impact on our innovation ecosystem and capacity to attract highly skilled talent into Australia, which benefits the economy in the long run.
“It’s really important that we do drive this part of the innovation policy framework forward.”
A major reform that should be considered is a reduction in the regulatory burden and compliance costs associated with employee share schemes, Mr El-Ansary said.
The inquiry should focus on how to encourage the use of employee share schemes across the economy, not just in tech, according to angel investor and M8 Ventures founder Alan Jones.
“Fundamentally, the government should be encouraging the broad adoption of ESS in the Australian economy, not just for the tech sector but for the broader economy as a whole,” Mr Jones told InnovationAus.
“The current law tries too hard to restrict the use of ESS to a small set of conditions that only apply to a small set of companies for a short period of their growth.”
The current restrictions around ESS is leading to tech companies moving overseas, Mr Jones said.
“There are many reasons why large Australian technology companies choose to move their headquarters to other jurisdictions, but the turnover cap on ESS would have to be one. How does the government expect a company to manage the compensation of a workforce where some pre-$50 million employees have ESOP and post-$50 million employees have none?” he said.
“Successive governments have repeatedly failed to grasp that the main goal here is to compete internationally against other OECD nations for the best possible talent, at a time when that talent is more mobile and more amenable to relocating than ever before.
“Being seen as an ESS-unfriendly market where costs and restrictions are high, visas are difficult to obtain, personal taxes are high and cost of living is high makes that very difficult indeed.”
In November 2018 the Coalition unveiled planned reforms to employee share schemes in an effort to “help employers attract, retain and motivate employees and grow their businesses”. The government acknowledged that the current scheme was “complex and fragmented and ultimately discourages some businesses from offering employee share schemes”.
But the government has not moved forward with these planned reforms, and only released submissions to consultation on the matter over the Christmas break.
Many of the submissions welcomed the changes but pushed for much more significant reforms to make the scheme more competitive with other countries.
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Employee engagement is 100% NOT the point. They are a fundamental part of the remuneration package of those employees and under current rules are completely unworkable. Entrepreneurially minded employees attracted to early stage companies are prepared to sacrifice some day-to-day rem for the upside of shares. The most talented and senior employees, who are the key drivers of these firms, trade off large amounts of salary for the upside of shares. That reduces the operating costs of these companies (critical at this stage) and creates shared and aligned risks and returns.
But current rules make that trade-off completely unaffordable and inefficient for both employee and employer. Which fundamentally hamstrings our entire entreprenuerial economy. That is not a good thing. The rules before weren’t best practice but worked fine – and were broken in 2009 because of a knee jerk reaction of a govt that were afraid Investment bankers were benefiting from these rules. See here: https://www.smartcompany.com.au/business-advice/politics/why-australia-keeps-getting-it-wrong-on-employee-share-schemes/
The premise of this article is Employee Share Schemes drive employee engagement. While ESS does not hurt engagement, it has only a small positive effect. If you want engagement and profitable growth, learn from companies who excel at both. Industry leaders like Southwest Airlines, BHP, Capital One and many private companies economically engage their employees as trusted partners in the business, driving and participating in the profitable growth of the company. They focus on challenges, not perks. Their engagement and profit results speak for themselves. These Forbes and Harvard Business Review articles provide more background: https://hbr.org/2018/01/more-than-a-paycheck http://www.forbes.com/sites/fotschcase/2016/05/31/engage-your-employees-in-making-money/