House of Representatives

Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015

Second Reading Speech

Mr BILLSON (Minister for Small Business)

I move:

That this bill be now read a second time.

Today, I introduce a bill that energises enterprise and makes life easier for the hard working women and men of small business.

This bill introduces important improvements to the taxation of employee share schemes, removing key impediments introduced by the former government and creating a new 'start up' incentive to restore and rebuild employee share schemes as a key tool to support enterprise formulation.

Employee share schemes support and encourage innovation. They energise enterprise and entrepreneurs.

An effective employee share scheme can support those hard-working women and men out there having a go.

Employee share schemes can drive growth in jobs and growth in productivity important ingredients in a healthy economy.

Employee share schemes offer employees a financial interest in the company they work for, aligning the interests of employees with the interest of their employers. This synchronicity of interests and objectives can drive innovation, entrepreneurship and enterprise success.

Both shares and options provide employees with a direct interest in the performance of the firm. They can turn out to be very lucrative for employees of successful companies.

These schemes encourage positive working relationships and reduce staff turnover.

Employee share schemes benefit employers, too.

They are a very valuable tool for employers to attract and retain talented employees.

We know small firms sometimes lack the cash flow to pay salaries that can allow them to compete internationally. Employee share schemes allow firms to be globally competitive by supplementing employees' salaries with equity in the company they work for.

Unfortunately, the potential of employee share schemes has not yet been realised in Australia. This means we are missing opportunities every single day.

Our government knows that our country's tax system should not be an impediment for innovative companies hoping to form, successfully start up and grow their business and in turn employ people and grow our economy.

In 2009, the Rudd Labor government introduced integrity measures and changed the tax treatment of employee share schemes. Labor's 2009 amendments meant that the discount component of shares or options is taxed when the employee receives those shares or options. This often forces employees to pay tax on their options before they can take any action to realise a financial benefit from those options.

We have seen the current tax arrangements effectively halt the provision of options through employee share schemes.

These taxation arrangements, introduced by Labor, are not competitive by international standards as they generally bring forward the taxing point well in advance of any prospect for a realisable gain.

The 2009 amendments also introduced integrity measures to limit opportunities for tax avoidance by requiring the reporting of schemes and participants. These sensible measurers will remain, while the government deals with the harm caused by the ill conceived tax treatment changes.

I want to acknowledge and recognise the engagement and strong support of this initiative by the Minister for Communications and the Treasurer.

Because we are serious about getting this measure right, our government has consulted extensively on this issue, and has listened to the concerns of a range of stakeholders. I want to recognise the deep interest, the direct involvement and thank the member for Forde; the chair of the small business policy of the government, Bert Van Manen; and also the member for Casey, Tony Smith, the chair of our government's economic policy committee for their direct involvement and commitment to this change. I also want to thank and recognise the diligence and the collaborative approach of the Treasury officials who have worked hand in hand with key stakeholders to get these measures right.

In the most recent round of consultations earlier this year, our government hosted a number of face to face and teleconference meetings and received over 50 written submissions.

This input revealed very strong support for the government's announced commitment to remedy a number of problems with the current taxation of employee share schemes. There were two significant areas of concern.

Firstly, the current rules mean employees often are forced to pay tax on their options before they can even get any financial benefit from the options by converting them into shares and selling the shares. This means employees have been taxed on something that is difficult to value and may not even result in a benefit to the employee.

The 2009 changes effectively ended the provision of options under employee share schemes, particularly by start ups. This limited the start ups' capacity to remunerate its employees. It put Australian firms at a disadvantage compared to those in many other countries.

In a world where employees can easily cross international borders, the 2009 changes affected the ability of our Australian firms to compete globally for the best and brightest team.

The second issue that many stakeholders were affected by was around the red tape and the compliance costs currently associated with setting up and maintaining an employee share schemes in Australia.

Let me share one example with you today, companies offering an employee share scheme in Australia are required to have a comprehensive company valuation completed.

Stakeholders revealed that this sort of valuation and the preparation of required documents can cost up to $50,000 in Australia. This is compared with a cost of around $2,000 to $5,000 in the United States.

It is a pronounced problem for start up firms, which are poorly placed to bear the impact of these regulatory costs.

This significant red tape problem must be addressed if we are to improve the competitiveness of our nation and of our economy. This needs to be addressed if we want Australia to be the best place to start and grow a business or if we want to secure Australia's future as a preferred destination for innovative start up companies.

Our government has listened to the concerns of stakeholders. We are committed to making it easier to do business in Australia. This bill will address the problems arising from the 2009 amendments and will make Australia's taxation of employee share schemes more competitive internationally.

Today the bill makes two main changes to the tax arrangements for employee share schemes.

First, employees issued with options under employee share schemes will generally be able to defer tax until they exercise those options. This is rather than them having to pay tax when they actually receive the options.

This will benefit employees by deferring their tax liability until they are actually able to realise a financial benefit from their options.

Our government will also extend the maximum time for tax deferral from seven years to 15 years, which will give companies more time to build their business and succeed.

The maximum individual ownership limit currently restricts employee ownership for those accessing an employee share scheme tax concession. The bill doubles this limit from five per cent it is at present to 10 per cent, which could help some founders and provide a boost for critical workplace team members.

These improvements will be available to all companies, from large biotech and mining companies listed on the stock exchange to small, unlisted businesses looking to take on their very first employee.

The amendments encourage more Australian companies to realise the potential of employee share schemes.

And those companies establishing such schemes will become more competitive in attracting talented employees in an international labour market. We are ensuring these businesses can be nimble in the global economy.

Secondly, we will provide an additional concession to start up companies. This new incentive is unashamedly targeted at young enterprises to reactivate and energise employee share scheme arrangements for the productivity enhancing, entrepreneurial and innovative start up sector.

Employees of eligible start ups can receive options or shares at a small discount, and if they hold the shares or options for at least three years, they will not be subject to up front taxation.

For options, the discount component will be taxed when the employee is in a better position to fund the tax liability. For shares provided at a discount of up to 15 per cent, the discount component will be exempt from tax.

To qualify for this concession, companies must have been incorporated for less than 10 years, be unlisted and have turnover of no more than $50 million per year.

These eligibility criteria mean that the concession is targeted towards small and start up firms. The innovators we are committed to encouraging are those who often face additional liquidity and valuation obstacles that larger firms do not. The eligibility criteria will also limit and manage the cost to revenue at a time of fiscal repair.

This concession will provide a significant benefit to many companies in the start-up phase. It will give them a better chance at achieving success in Australia, instead of being forced to look overseas for more favourable business conditions and a potentially more supportive entrepreneurial ecosystem.

These measures are about more than just providing a benefit to companies and employees engaged in employee share schemes. It adds to and supports our economy as a whole as we retain Australian talent and better support Australian innovation and entrepreneurship.

To address the excessive red tape burden, our government has asked the Australian Taxation Office to work with industry to develop and approve 'safe harbour' valuation methods and standard documents. This will help streamline the process of establishing and maintaining an employee share scheme, reducing costs and compliance burdens that may discourage employee share scheme engagement.

A number of integrity measures designed to limit tax avoidance opportunities, such as reporting schemes and participants and limiting the $1,000 up-front tax concession to employees who earn less than $180,000 per year, will be retained.

All of these amendments will help align the interests of employers and their employees, as everyone involved in the business will have the financial and emotional motivation to grow their company.

The amendments will help stimulate the growth of high technology start ups in Australia. The changes make Australia a more attractive destination for innovative companies seeking to commercialise their ideas domestically.

These changes boost the competitiveness of Australian firms who are committed to attracting and retaining talented employees in the international labour market.

Our government has worked with industry to make sure that the draft legislation delivers the intended outcomes. We have listened to stakeholders and made amendments to the draft that was circulated some months ago.

In particular, we acted on stakeholder concerns regarding access to the capital gains tax concession, and eligibility for the start up concession where certain venture capital funds are involved.

Stakeholders told us that most people convert their options into shares around the time they sell the shares. Under usual capital gains tax rules, this would mean that most employees of a start up would not benefit from the 50 per cent capital gains tax discount because they have not held the shares for more than 12 months. This is despite a requirement to hold the option for at least three years in order to get the additional concession for start ups.

Today's legislation addresses this issue and has been enhanced by collaborative and constructive consultation with stakeholders.

It makes it clear that the 50 per cent capital gains tax discount will be available for options issued to beneficiaries of the start-up concession, even where the underlying shares are held for less than 12 months. This will provide a significant concession to employees who are issued with options under the start up concession. It is a further incentive for employers hoping to offer employee share schemes to their workers.

Our government has also provided a carve out for certain venture capital funds from the aggregated turnover and 10 year incorporation rules for the start up concession. This will allow contributing venture capital limited partnerships, early stage venture capital limited partnerships and others to be excluded from the assessment of aggregate turnover and the period of incorporation. This will expand the number of employees eligible for the start up concession and, according to the Australian Private Equity and Venture Capital Association Limited, make sure the additional concession gets to 'the very kind of start ups that Australia needs to nurture.'

As a result of our extensive consultations, we have also picked up many suggested technical amendments to make sure the legislation has the desired effect. Examples include allowing the Australian Taxation Office discretion in regard to the three year holding rule; clarifying that the refund provision applies to cancellations; and clarifying that the definition of broad availability of the scheme applies only to shares.

We understand that some think the changes do not go far enough. We have heard those thoughts.

We have heard that having a taxing point when someone leaves their job is not appropriate. The refund rules contained in this legislation should help to address some of this concern. The refund rules mean that income tax paid on options when employment ceases will be refundable if the option is subsequently not exercised and lapses, or is cancelled.

Even in the constrained fiscal environment we currently face, our government knows the benefits that can be achieved by stimulating entrepreneurship and innovation in the economy need to be supported.

These amendments will come at a cost to revenue of around $200 million over the forward estimates, but this cost will be far outweighed by the many benefits that the new arrangements will bring.

During consultations, some suggested that the start up concession should be applicable for older, listed technology and mining start ups. But all policy needs to be weighed against other priorities and the cost to taxpayers. So keeping this at the forefront of our mind, and on balance, we have decided to keep the additional concession focussed on genuinely early stage firms that are more likely to have cash flow issues.

Another strong message we heard in consultations was that stakeholders want this legislation to be in effect as soon as possible. In response, our government intends to bring the amendments into effect for new shares and options issued from 1 July 2015.

These amendments go to our commitment to ensure Australia is the very best place to start and build a small business, we are committed to bolstering entrepreneurship and innovation in Australia. They provide a valuable tool that will benefit employers and employees, but importantly, they will ultimately benefit the health and vitality of our Australian economy.

These changes make Australia a more attractive destination for investment, particularly for innovative start up firms.

They will increase the international competitiveness of Australian firms who we know need to compete with companies all over the world for talented employees.

Our government is committed to ensuring the settings are right for Australian start ups and small businesses to grow and prosper.

Full details of the measure are contained in the explanatory memorandum.

I commend the bill to the House and encourage its early passage.

Debate adjourned.