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Push to reform taxation of employee share scheme gathers steam

Monday, 3 March 2014 | By Paul Pennay

Momentum behind the campaign to change how employee share schemes are taxed is increasing, with government MPs set to be briefed later today by a lobby group which says the government should simplify the current arrangements.


This latest move to persuade politicians of the need for reform comes as a consultation process led by Treasury wrapped-up last month. That review was initially launched by the previous government last year, but was put on hold during last year’s federal election campaign.


Under current rules, employee share options are treated as income and taxed at the employee’s marginal tax rate. If no concessions apply, any discount on the market value of an interest in a share or right provided to an employee under a share scheme is taxed as part of the employee’s taxable income in the year it is acquired rather than when it’s disposed of.


Angela Perry, chair of Australia’s national employee ownership advocacy group Employee Ownership Australia, will make a presentation to members of the coalition’s Economics and Finance Committee later today which will try to persuade lawmakers of the need to simplify the current arrangements.


Adrian O’Shannessy, a member of the Employee Ownership Australia’s expert panel told SmartCompany the former government went too far when it changed the way the schemes were taxed in 2009.


Although acknowledging there was a need to tighten up on reporting requirements, O’Shannessy argued many of the changes to the ESS tax rules were not necessary and  impacted negatively on start-up companies which rely more on equity than other businesses.


The changes brought in five years ago were aimed at executives who tried to reduce tax by channelling income into share options. O’Shannessy argues these concerns could have been addressed through a tightening up of the reporting regime.


The Institute of Public Accountants, one of the groups to participate in the Treasury's consultation process, noted in their public submission that one of the most effective strategies for cash-strapped entrepreneurs to attract talented staff was to offer employees shares in the company.


“Without the cash flow to offer a competitive wage, an equity stake is the best option to attract and incentivise employees, but the current rules make this strategy null and void,” says IPA chief executive Andrew Conway.


The IPA has recommended there should be a review of the taxing points at which share options are taxed, particularly for start-ups.


“By deferring the taxing point it avoids the need to value the shares when they are granted and also provides the employees with the funds required to pay the resulting tax on any discount given,” Conway says.


“The government needs to invest in ways to ensure the entrepreneurial spirit remains in Australia.”