It is common that in start-up companies, one mechanism of attracting and rewarding high calibre management is the use of  'employee share schemes' (ESS). In lieu of salary, high performing employees will receive share options which are often escrowed, but are intended to be traded at a later date for the individual's financial benefit. This mechanism is a form of incentive for the individual who is presumably motivated to work hard to help in the increase in the value of the shares in the company. Australian governments are frequently criticised not only for the relatively low level of support for Australian start up businesses, but in this context, for the complex administration and taxation requirements around ESSs which mean that these schemes are sometimes perceived as not being the motivator that they should be.

A discussion paper (PDF 316 KB), Employee Share Schemes and Start-up Companies: Administrative and Taxation Arrangements, has just been jointly released by the Treasurer, the Minister for Innovation, Industry, Science and Research  and The Minister Assisting for the Digital Economy. It outlines ESS current arrangements and possible options for changes to the ESS system.

Proposed measures to address the barriers faced by start-up companies suggested by the Review include:

  • developing guidance to reduce the administrative burden (meaning the cost of valuing shares and options) of establishing an ESS,
  • adjusting the valuation methodology of option, and
  • examining the point at which share options are taxed for start-up companies.

The proposed "start-up" definition would require that a business:

  • have 15 or fewer employees,
  • have aggregated turnover of less than $5 million and not be a subsidiary, owned or controlled by another corporation,
  • have been in existence for less than five or seven years (to be confirmed),
  • be providing new products, processes or services based on the development and commercialisation of intellectual property,
  • be unlisted, and
  • have the majority of its employees and assets in Australia.

The closing date for submissions to the Manager, Venture Capital Policy in the Industry and Innovation Division of Treasury is 31 August 2013. The review will report back to government by December 2013.

More analysis is available via the Australian Institute of Company Directors here.