There'll be changes to the taxation of employee share option schemes from 1 July 2015, but no word yet on crowd funding.
There are mixed messages for start-up companies in the Federal Government's new "Industry Innovation And Competitiveness Agenda".
The good news is that 1 July next year has been set as the start date for new rules on taxing employee share and option schemes. This is intended to encourage start-ups by making it easier to attract talented employees.
On the other hand, any changes to how start-ups are to obtain capital remain up in the air: the Government has apparently decided not to implement CAMAC's crowd-sourced equity funding proposals without further consultation.
Employee shares and option schemes
Employee options have traditionally been a popular way for start-up companies to attract talented staff, without having to pay them a high salary. A problem with employee option schemes in Australia is that under the current rules employees may effectively be required to pay tax on unrealised assets.
Until 2009, employees could elect to defer paying income tax on the value of their options until the options were exercised. However, from that year onwards, employees no longer have a choice, and could potentially be taxed on any discount at the time the options are granted or when they vest, subject to some limited concessions for employees earning under less than $180,000 pa. This means that employees could be required to find cash to pay tax on the value of options that had not been realised. The result is that the 2009 amendments to the tax rules effectively brought a halt to the use of employee share schemes by start-up companies in Australia.
From 1 July 2015, the Government wants to change this, while retaining the 2009 concessions. From that date, employees with options may again be able to elect to defer tax until they exercise those options. Employees earning less than $180,000 pa will still be exempt from paying income tax on the first $1,000 of interests that they receive.
In addition, the Government intends to legislate an additional tax benefit for "eligible start-ups".
The criteria for an "eligible start-up" will include having a turnover of no more than $50 million (not $50,000, as reported in one newspaper), being unlisted and having been incorporated for less than 10 years.
Where eligible start-ups offer shares and options to employees at a small discount, that discount will be exempt from up-front taxation, as long as the shares or options are held by the employee for at least three years. The Government has also announced that options under certain conditions will have taxation deferred until sale, and that shares (issued at a small discount) will have that discount exempt from tax. Furthermore, the Government wants to extend the maximum time for tax deferral from seven years to 15 years.
The Treasurer will consult with industry to ensure that any draft legislation delivers the intended outcome, with the legislation proposed to come into effect on 1 July 2015.
Crowd-sourced equity funding
As we reported in June, one of the last acts of the Corporations And Markets Advisory Committee was to propose a detailed new regime that would allow start-ups to raise equity capital through crowd-funding.
The "Industry Innovation And Competitiveness Agenda" statement includes crowd-sourced equity funding, but does not announce a start date for the implementation of CAMAC's recommendations. Rather, the paper says that the Government "will consult widely on a regulatory framework to facilitate crowd sourced equity funding, building on CAMAC’s report".