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Employee share scheme tax treatment needs reform to support start-ups, say accountants

Monday, 13 January 2014 | By Gavin Lower

Australia’s accountants have added their voice to calls to reform the tax treatment of employee share schemes, arguing current arrangements are building an unattractive and non-competitive environment for entrepreneurial Australians.


The Institute of Public Accountants says 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.


Under the 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.


“Asking employees to pay tax on blue sky which may never be realised considering the high failure rate of start-ups is like paying tax on a TattsLotto ticket before it is drawn and without the winnings,” Conway says in a statement.


The federal government is yet to decide whether it will change the tax rules around employee share schemes. A review was launched by the previous Labor government.


The IPA’s comments come as just last week it was revealed Australian successful start-up story, Atlassian, plans to base itself in the United Kingdom in preparation for an initial public offering there.


“Innovation is vital to Australia as it transitions from traditional employment sectors to a digital economy,” Conway says. “New innovative technology start-ups have the potential to generate new markets and significant employment growth.”


The IPA has recommended that 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.”