Draft bill eases ESOP tax rules for startups

Legislation includes changes from Abbott Government's 'competitiveness agenda'

The Australian Government has released a draft bill to reform how employee share option plans (ESOP) are taxed in an effort to make it easier for startups to attract and retain talent.

The draft bill, which can be read on the Treasury website, formally proposes the changes announced last year in the government’s $400 million Industry Innovation and Competitiveness Agenda.

The legislation would reverse tax rule changes made under Labor in July 2009 that have discouraged Australian startups from providing employee stock ownership plans (ESOPs) to employees, said Abbott. They required that the employee is taxed on the value of the share option when it is issued, before any payments are made.

The change will mean that options won’t be taxed until the employee executes the option. This is better for cash-poor early stage startups, which can use share options as an alternative to a larger salary.

In addition, the proposal includes $200 million in tax incentives over four years for employee share ownership for companies with less than $50 million that are unlisted and younger than 10 years old.

“We have designed these changes to increase the international competitiveness of our tax system and allow innovative Australian firms to attract and retain high‑quality employees in the globally competitive labour market,” Small Business Minister Bruce Billson said in a statement.

“We have listened to enterprising Australians during extensive consultations, and we have heard time and time again that the current taxation regime for Employee Share Schemes is uncompetitive and unattractive.”

Startups had been calling for the reversal of the ESOP tax rule for some time and have for the most part applauded the changes proposed by the government.

“The fact that the hugely damaging regulations around ESOPs for startups are finally being changed is hugely positive, and the government should be rightly commended for doing so,” StartupAUS board member Peter Bradd said in October.

However, the restriction of tax incentives to early-stage startups has been criticised since it would exclude older and larger Australian-born companies like Nitro and Atlassian.

“These are companies that already employ hundreds or thousands of people,” Nitro CEO Sam Chandler said in November. “They will employ thousands of people in the future. And these are all companies that have either already passed one of those thresholds or both of them, or will in the next year or so.”

Written submissions on the draft bill are due 6 February.

Adam Bender covers telco and enterprise tech issues for Computerworld and is the author of dystopian sci-fi novels We, The Watched and Divided We Fall. Follow him on Twitter: @WatchAdam

Follow Computerworld Australia on Twitter: @ComputerworldAU, or take part in the Computerworld conversation on LinkedIn: Computerworld Australia

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Tags legislationstartupstaxStartupParliamenttaxesemployee share schemes (ESS)billsemployee share optionsEmployee Share Option Plan (ESOP)

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