The Bill amending the taxation of employee shares and options has now received royal assent and takes effect from 1 July 2015.

Accompanying the changes the ATO has also released a set of standard templates for an Employee Option Plan, Offer letter and an instruction guide for companies that satisfy the criteria for the startup concession. Refer to this earlier Riposte for more details on the changes. In addition, safe harbour market valuation methodologies for qualifying startups have now come into effect.

Peter Dunne of Herbert Smith Freehills and Toby Eggleston and Adrian O’Shannessy of Greenwoods & Herbert Smith Freehills assisted with the preparation of the documents. While the documents can be used to assist with initial planning, we recommend that companies obtain professional legal and tax advice to ensure that the documents meet their specific requirements.

In order to utilise the startup concessions either:

  1. If options are being issued, the options must have an exercise price equal to at least the market value of the ordinary shares; or
  2. if shares are being issued, the shares can be issued at a discount of up to 15%.

There are 2 alternative safe harbour valuation methodologies available.

For companies that have been incorporated for less than 7 years and have not raised over $10 million in capital (either debt or equity combined) over the preceding 12 month period, the method for valuing the company is based on the net tangible assets of the company. The value of the ordinary shares is determined after taking into account the ‘liquidation preference’ on any preference shares on issue, and then the balance is then applied to the ordinary shares pro rata. The dilution effect of any options on issue is not taken into account. This NTA methodology may mean the ordinary shares may have little or no ‘market value’ once the liquidation preference is taken into account. This could be particularly useful for technology startups.

For startups that don’t meet these requirements an alternative methodology can be used. In that case the valuation must be performed by either the CFO or a qualified valuer and must take into account:

  • the value of tangible and intangible assets of the company;
  • the present value of anticipated future cash flows;
  • the market value of similar businesses, including the use of earnings multiples; and
  • uplifts and discounts for control premiums, lack of marketability and key person risk.

Freehills Patent Attorneys is associated with Herbert Smith Freehills Pty Ltd. This article was written byToby Eggleston (Director) and Cameron Blackwood (Director) and first published on the Greenwoods & Herbert Smith Freehills website.