Add tax laws governing employee share schemes to the many challenges Australia’s startups already face.
Leading the fight against the entrepreneurially regressive regime is not the entrepreneurs themselves but the accountants. The Institute of Public Accountants has called for a review of tax rules that effectively treat employee share options as income and tax them accordingly in the year it is acquired, rather than on disposal.
“Asking employees to pay tax on blue sky which may never be realized, considering the high failure rate of start-ups, is like paying tax on a TattsLotto ticket before it is drawn and without the winnings,” said Andrew Conway, the IPA’s chief executive.
Take a leaf out of other nations’ books
What such a tax regime does is drive innovation offshore, Conway warns.
“This puts start-ups at a huge disadvantage compared with more supportive regulatory environments in other countries. Consequently, we read too often of innovative, entrepreneurial businesses setting up shop overseas,” he said.
Entrepreneurs are exercised by the tax regime.
“I think the ATO needs to review how countries like the U.S. treat these schemes and the positive result on entrepreneurial ventures,” Stephen Burns, co-founder of Mr. Tax Refund Pty. Ltd., told Anthill.
Burns said his firm is planning an employee options program. Consequently, “like many firms in high-growth phase, money is tight and attracting quality talent with lower wages in return for stock options is a necessary part of our strategy,” he added.
Long-term plan needed for startup ecosystem
“ESS are critical for most early-stage startups as most don’t have the funding to attract and retain talent. Australia needs to develop a 20-year plan that will see the development of tech startup ecosystems in each state,” Gerard, whose startup has developed a cloud-based, SaaS (Software as a Service) solution for managing engineering drawings, said.
“With Australia’s very limited venture capital market it’s extremely hard to fund a startup in Australia. ESS is one way to mitigate this. We don’t want to move offshore, but if the Australian tech startup environment doesn’t improve we may have no choice,” added Gerard, whose startup already is working on plans to expand to overseas markets.
Conway’s accounting group is urging the federal government to review the tax, and invest in ways to ensure the entrepreneurial spirit remains in Australia.
“The IPA recommends the review of the taxing points at which share options are taxed, particularly for small business start-ups. Securities provided by companies that meet certain eligibility criteria should have the option of deferring ESS taxing point to when securities have been realised and are able to be traded,” Conway said.
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, he added.
Innovation is vital, more than ever
Already, startups have been disadvantaged in the new year as Tony Abbott’s Coalition government backtracked on two key reform measures. Late last year, it said it would not proceed with the proposal for speedier tax breaks for money small businesses spend on research and development – on a quarterly basis, rather than after the current 16 months. Secondly, the government said it would not move to amend tax rules that put domestic investors on par with foreign venture capital.
Surely innovation is vital to Australia, especially as it transitions from traditional employment sectors to a digital economy.