Federal budget to revamp employee share schemes for startups and emerging businesses in $500 million package

The Morrison government is expected to revamp taxation on employee share schemes in a bid to boost technology, innovation and entrepreneurship.

As part of Tuesday’s budget, a $500 million reform to employee share ownership schemes will reportedly boost incentives for startups and emerging businesses to offer their staff equity.

What is an employee share scheme?

Employee share schemes (ESS) give employees the benefit of buying shares in the company they work for at a discounted price, or the chance to buy shares in the company in the future.

Presently, current employees are eligible for tax concessions on shares owned through an ESS. However, once an employee leaves a workplace, those concessions are no longer applied to their shares.

What will change?

As part of the government’s $500 million overhaul, former employees will not be required to pay tax on shares after they leave a business.

And, for unlisted companies, the cap on the value of shares sold or lent to employees will increase to $30,000, up from $5,000.

What else does the package include?

Along with simplifying employee share schemes, the government is expected to change individual tax residency rules, review tax incentives linked to venture capital, and establish a concierge service to encourage foreign investment in the country.

Individual tax residency rules will be streamlined under a new test, allowing a person to be considered an Australian tax resident if they are physically in Australia for at least 183 days in a year.

The government is also expected to review tax incentives linked to venture capital to ensure early-stage Australian startups have the opportunity to access the investment they need.

Finally, the ATO will create a concierge service to provide foreign investors with tax advice related to relocating to Australia.

What does industry say?

Global financial firm network PwC called on the government to simplify employee share schemes to back technology, innovation and homegrown entrepreneurship in a submission to the government’s  select committee — tasked on making Australia a technology and financial services hub — in April.

Jonathan Malone, PwC tax partner, said many startups in Australia do not have the initial revenue base they need to remunerate the staff they require, and instead turn to shares as a way of attracting and retaining valuable talent.

But currently, managing the tax rules results in such schemes being complicated such that they may be avoided altogether, he said.

“Not only would reforming the existing taxation of employee share schemes help attract talent, it would also help emerging technology companies.”