Treasury and the Department of Industry and Innovation are currently undertaking targeted consultation regarding employee share scheme options including their use and impact on Australian start-ups. This issue has been raised through various consultations with industry including the Prime Minister’s Digital Economy Forum in October 2012. At the Forum, the Prime Minister committed the Government to the development of a Digital Economy White Paper (link), to examine how the Australian Government can best support the growth of the digital economy. The White Paper is expected to focus on aspects such as digital innovation and the supporting regulatory environment, including how to encourage innovation and investment in Australia’s digital economy, as well as adoption of cloud computing, ICT skills and teleworking. The outcomes of our consultations will also be considered in the context of the White Paper.I'm meeting with the department tomorrow morning. Below are my notes for the meeting. If you have anything you'd like me to add please leave them in the comments below.
We would like to meet with you in early January to discuss the experiences of start-up companies:
- in attracting and retaining skilled and experienced employees;
- the benefits they offer to employees, including shares or options; and
- the barriers to offering an employee share scheme, including how the current tax and other regulatory requirements may limit the ability of start-ups to offer such schemes.
Attracting people to Shoes of Prey
Attracting top talent, particularly outstanding software engineers and experienced digital marketers is hard in Australia. We invest a significant amount of our resources in building our name and reputation as being a great place to work, attracting top talent to apply for roles with us, then motivating and retaining these people once they're hired. We've had to compete with overseas companies to hire Australians, and on many occasions we've had to recruit from overseas to get the right person for the right role at Shoes of Prey. We've promised all these hires participation in an employee share plan and we're in the process of setting this up.
Benefits of an employee share plan:
- Drives employee engagement and loyalty. Engaged, loyal employees are happier.
- Aligns interests of employees with the company. Leads to greater success for the company, employees and the economy as a whole.
- Helps attract top performing employees. Superstar software engineers, marketers, sales people and others are able to work in many different countries in the global economy. Strong ESOPs can help keep them at Australian companies, and attract top talent from overseas to Australia.
- Allows wealth to be spread more evenly. If a company is successful, people working at the company benefit, not just the founders and investors.
ESOPs and high employee engagement have helped drive growth in the US economy in the last half century. It's estimated that 28 million US employees participate in an employee ownership plan, about 1/5 of the entire private sector. ESOP adoption rates are estimated at only 6% in Australia.
Problem with current tax policy
Current Australian tax policy treats options like compensation rather than capital gains for tax purposes. Employees therefore have to pay a significant amount of tax during the same year as the options are purchased, when, particularly at startups, there is a reasonably high probability those shares may never realise any value for the employee. There is a complicated way around this, that involves a limited recourse loan arrangement provided by the employer. We're exploring this now but it's relatively complicated and expensive to set up for a startup and could be made much simpler.
How to resolve this
The taxation treatment of ESOPs needs to change so that employees aren't taxed on their options when they're received, instead the sale of the options should be treated as a capital gain when they're sold and a cash payment is received.