Changes to Employee Share Schemes for start-ups and small businesses

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Table of Contents

• Taxation Changes
• Benefits for Business
• Conclusion

The upcoming changes to Employee Share Schemes (ESS) will greatly benefit start-ups and small online businesses in Australia. These proposed amendments by the Federal Government, through the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, will affect primarily the tax treatment of ESSs, and will take effect from 1 July 2015. These changes will only affect start-ups that are less than 10 years old and have an annual turnover of less than $50 million. In the event a start-up raises venture capital, this will not affect the eligibility threshold.

Under the current system, start-up employees who are issued shares or options have to pay income tax at the time they receive those shares or options, regardless of whether or not they have realised any financial benefit from them. Under the new changes, employees will generally not be liable to pay up-front tax on those shares or options. Employees will only have to pay tax on their shares when they receive a financial benefit from those shares (i.e. when the employee sells the shares). Contact LegalVision and talk to one of our specialist business start-up lawyers to ensure your business structure is set up correctly to plan your tax liabilities and to take advantage of the new changes to the Budget.

Taxation Changes

There are a number of key taxation changes to ESSs. Eligible start-ups 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. One significant amendment is that the maximum time for tax deferral will be extended from seven to 15 years. This means an employee can hold onto their share or options for up to 15 years before they are required to pay tax. These tax concessions are available to any employee whose maximum individual ownership is 10 per cent, up from 5 per cent.

Benefits for Business

There are many benefits for small businesses, online businesses and start-ups. First, employees at eligible start-ups are now able to receive tax concessions. They can also defer these concessions for up to 15 years. This is beneficial for employees, as it lowers their tax burden and also provides an incentive to stay at a start-up for longer. Second, start-ups can attract and retain employees with share plans. This is particularly useful for start-ups with low start-up capital who may not be able to offer attractive salaries to employees. Rather, this capital can now be spent on developing the start-up. Third, start-ups are now more competitive with global rivals for scarce talent. Overseas, particularly in the US, employee share schemes have been crucial in boosting start-up growth. The upcoming changes to ESS will ensure the regulatory burden faced by young tech companies is significantly reduced.

Conclusion

Start‑ups are now able to immediately deduct legal expenses incurred when they start a business, rather than writing them off over five years. With this immediate cash flow benefit for small business, LegalVision can assist you in your business registration processes and structuring your business correctly. Contact us on 1300 544 755 and speak to our specialist business lawyers today.