In times of slow economic growth, innovation is key. We saw this after the 2009 Global Financial Crisis, when Silicon Valley kick-started the share economy, with Uber and Airbnb changing the way we think about catching a ride and booking a holiday.
One way to encourage innovation is through government-backed initiatives, such as small business grants and tax incentives. Through the Australian National Innovation and Science Agenda (NISA), the Australian government has instituted measures to help start-ups entice early-stage investors to help grow their business. For talent, this includes offering shares to workers so that they have a stake in what they are creating. Companies benefit from a highly motivated talent pool, and employees have values aligned with shareholders, making it in principle a win-win situation.
In Australia, Employee Share Schemes (ESSs) are widely popular in the start-up space, although not without challenges. For years, employees have faced major roadblocks in tapping into the ESS scheme, namely through the way ESS benefits are taxed. Should an employee want to leave a company after opting into ESS benefits, those shares were taxed at such a high rate that some were forced to sell the share or take out a personal loan to afford the tax debt.
This regulation put businesses at a strategic disadvantage in comparison to similar markets, like the UK and the US. American companies lead the world in the number of employee share plans offered and employee participation rates. For example, Employee Stock Ownership Plans (ESOPs) encourage a broad base of participation by putting shares in a trust that an employee can access once they leave the company. In the UK, employees at participating companies can take advantage of Share Incentive Plans (SIPs), which have variable means of participation, including up to £3,600 of free shares and buying shares out of your salary before tax deductions.
With more attractive alternatives to ESSs, in combination with lower comparable salaries and exchange rates, Australian companies have been put at a disadvantage when trying to attract highly motivated international hires, particularly in the tech space.
Last May, Australian Treasurer Josh Frydenberg laid out a proposal that may relieve the tax burden for ESS holders. Effective in July of this year, according to the AFR Australian Financial Review, employers “who charge or lend for issuing their employees shares in an unlisted company will be able to issue each employee up to $30,000 in shares a year, up from $5000.”
While this change is welcomed and needed, there is still space to grow.
One remaining hurdle is the administration involved in setting up an ESS scheme. Administration is time and cost prohibitive, a complaint that was submitted by multiple start-up heads to the House of Representatives Standing Committee on Tax and Revenue ahead of their report Owning a Share of Your Work: Tax Treatment of Employee Share Schemes. Some argued that ESS should be so easy to set up that it would become as ubiquitous as superannuation. This would make ESS more competitive with the US model, which treats some employee shares schemes as retirement funds. In addition, the $30,000 ceiling on shares offered per year may not compete with US or UK companies that have a higher ceiling.
Cryptocurrency exchanges also shoulder a unique burden regarding ESS. At present, tax incentives do not cover blockchain support currency, which may disincentivise those who may otherwise be interested in starting their own exchange or investing early in a promising crypto start-up. In addition, ESS exclusively covers traditional shares and does not at present extend to tokens that could be offered by exchanges to highly motivated talent in the market.
There is no silver bullet to adjusting tax schemes to better support innovation. Following the implementation of the new rules, we will have to monitor to see its effect. However, what we do know is that Australia has a diverse, enthusiastic start-up community that may have the opportunity to grow if we expand the way that we approach innovation schemes.
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