Reuben Bramanathan


Employee share scheme rules improved, but still behind the US and UK

3:42PM | Wednesday, 25 March

Australia’s startup community has welcomed improvements to the employee share scheme legislation, but raised concerns about exemptions for ASX-listed businesses and employees with more than a 10% stake in the company.   The Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, tabled in Parliament this morning, will wind back changes made by the former Labor government in 2009 and allow startup employees who are issued with options to defer tax until they convert them into shares.   The current legislation governing employee tax schemes has long been a headache for local startups wanting to attract talent to Australia.   Matt Barrie, the chief executive of Freelancer, told StartupSmart the tax regimes in America and the UK are “far better” than what is in the tabled reforms.   As it stands in the bill, companies with a turnover of more than $50 million will be exempt from the government’s tax concessions – as well as those listed on an approved stock or securities exchange.   “There’s more than just the $50 million [issue] … The ASX exemption is a disaster,” he said.   “Our government is paying lip service to supporting the technology industry.”   Reuben Bramanathan, senior lawyer at Adroit Lawyers, told StartupSmart it was disappointing the government had not addressed “some of the key issues” with the draft legislation that were raised by the startup sector during the consultation process.   “For example, the proper tax treatment is not available to employees with more than 10% of the company, which can cause problems for founders,” he said.   “Another real problem is that, if an employee resigns from a company on good terms, and they keep their vested shares, they still have to pay income tax at that time. This taxing point applies even if they are unable to sell the shares at that point, for example, due to lockup restrictions in the shareholders’ agreement.”   Small Business Minister Bruce Billson has defended the legislation, telling StartupSmart the bill was “unashamedly focused” on early stage startups and smaller enterprises.   Those concerns aside, the changes have been welcomed with open arms. Peter Bradd, the a director at StartupAUS, says it's encouraging to see the goverment recognise the potential of Australian startups and take steps to rectify the tax treatment of share schemes.   "Changes to the ESS will help Australian startups become strong drivers of increases in job creation and, because many help to drive technological change, this will lead to productivity gains and job creation for our economy," he says.   Meanwhile the chief executive of the Australian Private Equity & Venture Capital Association, Yasser El-Ansary, said in a statement the tax treatment of share schemes has been “a major handbrake” on Australia’s startup ecosystem for almost six years.   “There have been countless stories of home-grown Australian entrepreneurs packing their bags and relocating overseas because our tax rules in this area have been such a problem – especially when other countries around the world are going to great lengths to lure our entrepreneurs offshore,” he said.   El-Ansary says all members of parliament should get behind the proposed changes now that they have been tabled.   “The strength of our economy into the future will depend on our capacity to foster a more entrepreneurial culture where we encourage startups to attract and retain the best talent here in Australia.”   The new rules governing employee share schemes are on track to come into effect on July 1.   Follow StartupSmart on Facebook, Twitter, and LinkedIn. Buy tickets to the 2015 StartupSmart Awards.

Employee share scheme changes “unashamedly” aimed at early stage startups

3:43PM | Wednesday, 25 March

Early stage tech startups are the focus of changes to the employee share scheme legislation introduced into Parliament on Wednesday.   Small Business Minister Bruce Billson tabled the bill on Wednesday morning, saying the reforms will “restore and rebuild” startup incentives, which were taken away by the previous Labor government.   Speaking to StartupSmart after the second reading, Billson said an effective employee share scheme framework is an important ingredient to any healthy economy.   “There has been a consistent and loud chorus calling for change,” he said.   “The incoming government recognised that and we’ve set out not only to correct the harm of those 2009 changes, but stepping forward with new concessions to bolster support and engagement for employee share schemes.”   The changes   Companies and employees who are issued with options will generally be able to defer tax until they exercise the options (convert the options to shares), rather than having to pay tax when those options vest.   Eligible startups will be able to issue options or shares to their employees at a small discount, and have that discount exempt (for shares) or further deferred (for options) from income tax.   The maximum time for tax deferral will be extended from seven to 15 years.   The maximum individual ownership limit for accessing employee share scheme tax concessions will be increased from 5% to 10%.   Eligible startups need to have an annual turnover of less than $50 million.   In the event a startup raises venture capital, that will not affect the eligibility threshold.   If a startup is acquired before it has operated for three years, its original shareholders will still get their 15% tax deduction on the sale of the shares.     Billson says the changes are on track to come into effect in the new financial year.   “I’ve had encouraging early responses with opposition members and I’m optimistic that will all be implemented as per a tight and demanding timetable which is exactly what the startup industry were calling for,” he said.   StartupSmart understands there is support from within the Labor party to overhaul the current rules governing employee share schemes.   The legislation tabled in parliament today not only allows employees at eligible startups to receive tax concessions, but also ensures the regulatory burden faced by young tech companies is significantly reduced.   Billson says there will be “good-to-go template tools and documents” from the ATO available to help businesses wanting to set up an employee share scheme.   Reuben Bramanathan, senior lawyer at Adroit Lawyers, told StartupSmart there were some “key issues” with the draft bill that have carried over to its current form.   “If an employee resigns from a company on good terms, and they keep their vested shares, they still have to pay income tax at that time,” he said.   “This taxing point applies even if they are unable to sell the shares at that point, for example, due to lockup restrictions in the shareholders’ agreement.”   Billson says this was identified as an issue during the consultation process.   “This was an issue that came up and we consulted quite widely on that as we knew it was an issue of some interest,” he said.   “We extended the tax refund provision to cover situations where an employee is forced to pay when those options lapse or cancel. That’s what we’ve sought to do to alleviate that concern.”   Another part of the legislation that has been criticised is the exemption for startups turning over more than $50 million, as well as companies listed on the ASX. That means companies like Atlassian and Freelancer will not be able to access the scheme.   However Billson defended this, saying issues around employee share schemes “most visibly” affect smaller players.   “It’s unashamedly focused on startups and smaller enterprises,” he said.   “We’ve got to work within a frugal budget climate, therefore we’ve had to target these measures where they can best make a difference.”   Atlassian co-founder Mike Cannon-Brookes has criticised that position, telling SmartCompany last month it’s a bit like saying Facebook and Google don’t need to give employee share options “which I think they would disagree with”.   The new employee share scheme rules are due to come into effect on July 1 should they pass both houses of parliament.   Follow StartupSmart on Facebook, Twitter, and LinkedIn. Buy tickets to the 2015 StartupSmart Awards.

Employee share scheme reform needs to be more “founder friendly”

3:52AM | Thursday, 12 March

The federal government’s changes to the taxation of employee share schemes are not “founder friendly” despite being overall a step in the right direction, according to an Australian entrepreneur who has been consulting with policymakers.   Rebekah Campbell, founder of Posse, told StartupSmart the government – and Small Business Minister Bruce Billson in particular – have been “great” when it comes to hearing what startups need.    “They really listened,” she says.   “I think they have gone a long way to addressing the problems, but there are still a couple of big things from the startup side of things.”   However, Campbell says the exposure draft, which was released in January this year, needed to take another look at the 10% limit on shareholding provision.   “The current way the revised employee share plan is structured, if you own more than 10% you can’t defer the tax on those options,” she says.   “So it’s the biggest problem with the legislation – it is not founder friendly but employer friendly.”   Campbell says 10% is “such a small amount” and most founders will not feel like founders any more if they own that much of the company. Instead, they will feel like employees.   Reuben Bramanathan, senior lawyer at Adroit Lawyers, told StartupSmart although the draft legislation is good news in general for startups, there are “some gaps” which could cause problems.   “The 10% limit could be a problem for startups who have already raised funding at a valuation, and later need to bring on a new co-founder or want to increase equity incentives for the original founders,” he says.   “Any shares or options issued to someone who holds 10% or more of the company will be taxed up front. That 10% limit includes shares and un-exercised options.”   Bramanathan also points out that at this stage the proposed changes will not apply to foreign companies which employ Australians. In addition, employees will still need to pay tax on any shares or options they want to keep when their employment with the company ends.   “There has been a strong response from the startup sector to address these gaps,” he says.   “The new legislation really needs to address these things to give Australian startups a level playing field to attract and retain quality employees.”   The government hopes to push through its employee share scheme reforms by July this year.   Follow StartupSmart on Facebook, Twitter, and LinkedIn.

Employee share option scheme draft legislation amendments good news for Australian startups

1:50AM | Thursday, 15 January

Changes to employee share option scheme laws, released in draft legislation by the federal government on Wednesday, will help fix the unworkable situation of taxing startup employees on value that they don’t have and may never get.   The draft legislation provides more detail on the proposed changes, which the government committed to making last October, as part of its Industry Innovation and Competiveness Agenda.   Senior lawyer at Adroit Lawyers, Reuben Bramanathan, says the draft legislation is great news for Australian startups and their employees.   “If startups implement a complying ESOP, employees will generally pay tax when they exercise their options, rather than when they first get the options,” Bramanathan says.   “This won’t give startups free reign to hand out tax-free options – there are still a number of conditions that need to be met.   “There is more good news for all companies, not just startups, in the way that unlisted options will be valued for tax purposes. Under the proposed changes, options that are issued out-of-the-money will be deemed have a lower value than they do under current law. This will mean that options can be issued with a lower strike price, or for a longer period, without adverse tax consequences for the employee.”   The law will cover all Australian early-stage startups – companies with less than $50 million turnover, existing for less than 10 years. However, the changes will only apply to Australian companies, and won’t help Australians employed by a foreign company if they get equity in that company.   Bramanathan says he’s pleased to see practical changes contained within the legislation, like approved valuation methodologies and improved ESOP documents. These will be published by the Australian Tax Office and will remove the need for startups to get a professional valuation, which Bramanathan says can be prohibitive for early stage startups.   The ATO is now inviting interested parties to comment on the draft legislation. The closing date for written submissions is February 6.   Australian Private Equity and Venture Capital Association chief executive officer Yasser El-Ansary says it’s vital that the legislation is finalised and gets before Federal Parliament in enough time to ensure it takes effect on July 1 this year.   “Startups have been waiting for close to five years for these changes, so we need to get on with it,” he says.   “We will be looking closely at the draft legislation over the next few days to see if the changes deliver on the government’s stated policy objectives.”   Follow StartupSmart on Facebook, Twitter, and LinkedIn.

Employee share scheme changes: a good start but still a long way to go

10:51PM | Wednesday, 15 October

Australian startups and small businesses will generally be pleased with the proposed changes to the taxation of employee share schemes announced yesterday, but there are still a number of issues to be resolved before companies can start implementing new share and option incentives.   Those involved in the startup sector will be well aware of the problems that the 2009 tax changes caused, especially for early stage companies for whom incentivising their employees with equity is critical, due to limited cash flow.   The current rules impose income tax on employees ‘up front’, at the time they are granted shares or options, rather than when the options are exercised or when the shares are sold. There are some exceptions which can defer the tax, but many arrangements don’t meet the requirements for tax deferral.   Yesterday’s announcement recognises the problems faced by startups and the fundamental difference in remuneration strategy for many startup employees, who accept a below-market-rate salary in exchange for a share in the potential upside of the business they are helping to grow.   10 key points from yesterday’s announcement 1. For all companies, employees will generally pay tax on options when they are exercised, not when they are granted.   2. For employees of ‘eligible startups’, tax on shares and options issued at a ‘small discount’ can be deferred until sale. The maximum period for deferral will be extended from 7 years to 15 years.   3. Yesterday’s announcement does not confirm what will constitute a ‘small discount’ and this will be a critical part of the details of the new rules.   4. To be an ‘eligible startup’, the company must meet three criteria:   have under $50m turnover. be in its first 10 years. be unlisted.   5. Startup employees will need to hold their shares or options for at least three years to qualify for tax deferral.  The new rules will need to allow for situations where employee equity is returned by later-round investors or an acquisition of the company within the three years.   6. It appears from the announcement that when employees sell tax-deferred shares or options they will be taxed at individual tax rates and will not be eligible for the 50% CGT discount.   7. The new rules won’t come into effect until 1 July 2015. Companies still need to be careful about promising shares or options to an employee.  If a company gives an employee, today, the right to get shares or options in the future (even after 1 July 2015) that could trigger a tax liability under the existing rules rather than the new rules.   8. There is no indication about a cap on the amount of equity that a startup employee can hold and still be eligible for tax deferral.  If the current cap of 5% is carried over to the new rules, it could cause issues for key early-stage employees and co-founders.   9. The tax valuation methodology for employee options is to be ‘updated’ - but it is not clear whether this will result in more favourable or less favourable tax outcomes.   10. The new rules should include an approved valuation mechanism for early stage startups, to avoid the cost and complexity of formal valuations.   Yesterday’s announcement is good news, but there is still a long way to go.  The startup community needs to work with government to make sure the final version of the changes allows Australian startups to retain and incentivise employees without the significant tax and compliance costs they currently face.   Reuben Bramanathan is a senior lawyer at Adroit Lawyers.   Follow StartupSmart on Facebook, Twitter, and LinkedIn.