The government announced changes to employee share option rules on 14 October 2014. Deloitte is pleased to see so many of the changes from our submission to Treasury in February 2014 reflected in the government announcement, including:

  • Taxation of options for start-ups only at the time the underlying shares are sold and not before
  • Using revenue as a key criteria for defining a start-up
  • Holding of the equity instrument for three years
  • Extending the period of holding an option beyond the current seven years
  • A review of the valuation requirements underpinning equity taxation
  • A need for standard documentation for share plans for start-ups

Our submission set out to bring the voice of the start-up sector to Treasury and the government through our ‘Barriers to innovation’ survey. This was completed by over 100 companies across multiple sectors.

Register to download the submission here.

We are keen to keep this conversation going. Despite this step in the right direction, there are still a lot of unanswered questions for owners of start-ups, such as:

  • Will my current plan be able to access the concessional treatment or will I have to create a new plan to be eligible?
  • How will the start-up criteria be managed? e.g. Will the $50m aggregated turnover be taken from the company’s last P&L? Will the ATO have to approve the concession or is it self-assessment?
  • How do you value shares in an unlisted company, as that value is a key requirement in valuing an option using the tax tables?
  • Is this start-up concession available to founders and investors as well as employees or just employees?
  • Is this start up concession for Australian business only? Or can it apply to equity provided to Australian employees of overseas companies investing in Australia as well (providing the start-up definition is met)?

Deloitte looks forward to further consulting with the Government & Treasury as they work through the above items and other issues affecting start-ups.

  • Overall agree with all the sentiments: options should be taxed when they receive the proceeds of the sale not upfront when you’re pulling a valuation out of thin air. This is just mind blowingly obvious.

    I know the attempt at defining a startup is in reaction to the Treasury seemingly going down this path but it’s a complete nightmare of further complexity. Under your definition BigCommerce and Atlassian for instance would not have been a startup when they issued their employee equity.

    I don’t understand the need for a definition in the first place.

    There is a certain naivety in believing that options of any kind (all the way up to the ‘stable’ public companies that go up and down by 10-50%+ per year) can be accurately valued. The world’s best investors have no idea of what price an equity security will be in one year with certainty let alone 10+.

    I really believe no one knows the value of an option on any equity security. And that just means a patchwork quilt of complexity and exceptions and cottage industry accounting bandaids to keep up this charade.

    There is just a really simple solution: Tax when the shares are sold. Startups or otherwise.

  • David

    As a country, we spend a fortune on R&D – our government actively supports it. Indeed, we are in the top 10 country in most R&D indices. So how come we are outside the top 100 countries in ALL indices in commercialisation?

    Lets just export our expertise… who cares if we don’t get a financial return to justify our R&D costs?

    Come on Pollies, catch up with the real world and support us start ups. HELP us to stay here, grow here and become global from here.

    Our current ESOP is just another example of stupid policies that are counter intuitive!

  • Simple: options need to be taxed when the holder exercises the options and shares are sold. I’ll second Niki’s opinion on what defines a startup and whether we really need to define a startup to decide whether to tax a share option or not. We really don’t.

    If that’s too scary, define a startup as under a very low valuation and perhaps that will motivate startup founders to prioritise establishing an ESOP and distribute options to early hires.

  • George Freney

    Taxing options when they are issued does not make sense. Having to define startup is too complex and introducing a threshold will drive those companies that are actually established to IPO overseas. We need the policies around industrial relations, share options, taxation and R&D to incentivise companies to innovate, commercialise and scale-up in Australia. This will then make investing more appealing and help the overall ecosystem that is needed to enable startups to flourish. That will lead to more and better jobs for Australians.

  • Scott Frew

    I have scanned the document and would like to point out that restricting it to sub $15M companies it completely the wrong way thing to do, it also should just be the normal tests on CGT if they truly are options or shares with the 12 month relief.

    Distribution Central, is as you know, reaching the $300M after 10 years of growth from startup but is still using options to retain and motivate good staff. The test should instead be on its a privately held company rather than a threshold on revenue. It is for example ludicrous that my staff, especially those on lower incomes, should pay tax up front on options they may never get to if they leave the company before a control change event.

    As I understand it (and I am merely an entrepreneur, so unsophisticated when it comes to some of the issues the big end of town deal with), it was to stop public companies using options or share schemes to avoid income tax rather than to stifle innovation in privately held companies. My analogy is we are simply the dolphins that got pulled up in the government tuna nets.

    The options should only ever be taxed as CGT and at sale and until that happens we continue to force our talent/innovators to the welcoming arms of foreign countries of their benefit.

  • Jeremy Liddle

    I agree with Niki & Alan.

    Tax share/option allocations only when a gain is realised, and limit it to privately held companies to avoid the issue of public companies exploiting the legislation. It feels like we are overcomplicating the issue.

  • Peter Williams

    I think it is difficult to create a catch all definition but i would agree broader is better. Some of the best startups, particularly those relying on technical breakthroughs, are doing R and D over a long term before they hit the market so a long time horizon is a good thing.

  • AvalonDave

    No need for complex definition layers – this just creates a nightmare on so many levels.

    Just merely applying the tax when the options are exercised is all that’s needed. It’s at that moment when they can be precisely valued and the cash is available to pay the tax.

    Surely this is obvious.

    I typically work for US Startups out of Silicon Valley that issue Options to recruit talented people, that would otherwise be earning salaries way in excess of what these startups can afford. The option is a risk shared by the employee and company.

    The current tax regime hurts their ability to attract talent and drive competition & innovation into the local Australian market. This negatively effects the local market with higher prices from incumbent vendors to Australian Business & Government.

  • Ian

    This is good news. Given your/Deloitte’s role in championing the ESOP start-up cause, a comment on strategy:

    The Australian ESOP system should not be made inadvertently incompatible with ESOP-linked high tech financing models used by VCs in the USA.

    While Australia and USA are clearly distinct tax jurisdictions, their developed case law is much in advance of ours and much can be learnt about creative use of ESOPs from reverse-engineering Silicon Valley VC financing models.

    It would be good if the Australian ESOP system encouraged, not discouraged, overseas sophisticated investors from investing in promising Australian technologies.

  • Jorge

    It is great to see some positive and engaged discussion in the search for a more balanced ESOP system for Australia.

    Under any government, I would hope that the need to retain and encourage our best and brightest to both invest personally and financially into the organisations and economy that is nurturing their careers beyond dispute. It is a well understood mechanism that allowing staff to invest and feel ownership in the organisations they work for, leads to better retention outcomes, measured recognition and greater contribution.

    I strongly feel additional tax revenues at the expense of national productivity is not the path we want to take, so the submission by DeLoitte is a great start in the right direction although I believe that limiting staff incentive schemes to Start-ups and or consolidated revenue sized organisations limiting for the staff wanting to invest in companies they belive in.