House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Minister for Small Business, the Hon Bruce Billson MP)

General outline and financial impact

Improvements to the taxation of employee share schemes

Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to improve the taxation of employee share schemes (ESSs) by:

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reversing some of the changes made in 2009 to the taxing point for rights for employees of all corporate tax entities;

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introducing a further taxation concession for employees of certain small start-up companies; and

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supporting the Australian Taxation Office to work with industry to develop and approve safe harbour valuation methods and standardised documentation that will streamline the process of establishing and maintaining an ESS.

These changes will improve the tax treatment of ESS interests so as to facilitate better alignment of interests between employers and their employees, and to stimulate the growth of innovative start-ups in Australia by helping small unlisted companies be more competitive in the labour market.

Date of effect: This measure generally applies to ESS interests acquired on or after 1 July 2015.

Proposal announced: This measure was announced in the Industry Innovation and Competitiveness Agenda released on 14 October 2014.

Financial impact: This measure has the following financial impact:

Human rights implications: This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights - Chapter 3, paragraphs 3.1 to 3.5.

Compliance cost impact: Low; estimated compliance cost of $1.28 million per year on business.

Summary of regulation impact statement

Regulation impact on business

Impact: This measure would improve the income tax arrangements for ESS interests by offering additional income tax concessions to employees. This is expected to make Australia a more attractive investment destination for businesses, particularly innovative small start-up companies, and allow them to be more competitive in recruiting and retaining talented employees.

Main points:

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ESSs are a means to aligning the interests of employees and employers and can result in more productive working relationships, higher productivity and reduced staff turnover.

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In 2009, the former Government made changes to the way that ESS interests are taxed. Recent consultations have revealed a number of obstacles that are currently inhibiting firms from using ESSs in Australia.

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The regulation impact statement considers five options: maintaining the status quo, a deregulatory option, two regulatory options and a non-regulatory option.

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The Government has announced amendments to the taxation of ESS interests - this decision is a combination of the two regulatory options presented, which are the preferred options.