The federal government has indicated it will relax the tax burden of the current employee share scheme, targeting SME employees who own shares in the company they work for.
Currently employees are taxed when they receive share options from their company, rather than when they are sold or become full shares, but proposed tax changes could save the economy $1.4 billion.
Small Business Minister Bruce Billson told SmartCompany today the changes were one of a number of measures being considered as a part of the National Industry Investment and Competitiveness Agenda, all but confirming the government will relax the current rules.
Crowe Horwath partner David Lilja told SmartCompany the rules currently tax shares or options at the point where the risk of losing them no longer exists. The new scheme would instead see the shares taxed at the point they are sold.
The rules were brought in by the Rudd government in 2009 as a measure to stop executives who earn more than $180,000 from dodging tax.
Lilja says the current issue is the timing delay created between when an employee shareholder pays the tax on the shares and then sells them.
“They have to come up with money to pay tax debt, but they can’t actually liquidate those shares,” says Lilja. “It’s absolutely a disincentive.”
As many as 400,000 employees would stand to benefit from the proposed changes.
Billson says rolling back the harmful and damaging rules introduced by the previous Labor government is a priority for him.
“We’ve seen those changes act as an enormous disincentive for enterprising people,” says Billson.
“This change is a key priority, but all will be announced when the agenda is released.”
Billson says people still needed to keep in mind what is achievable “given a very tight budget situation”, and flagged eligibility and entity size as some of the factors being considered.
He says the incentive is targeted at the growth of entrepreneurialism and the SME sector.
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“It’s [currently] a disincentive and a discouragement to people making that kind of commitment and personal investment in an enterprise. It is unhelpful to efforts to energise enterprise in Australia.”
Billson says when SMEs are successful and evolve into something of real value, the tax point should land where there is a realistic value and an actual transaction to materialise that value.
Lilja says the new rules would make the process cleaner and would be more consistent with the way other assets are bought and sold, as shareholders would be taxed on the growth, rather than the purchase.
He says he has seen clients who have had to borrow money to pay the tax debt on their shares.
The startup community supports relaxing the current rules, as has CPA Australia.
CPA Australia chief executive Alex Malley told SmartCompany the existing arrangements are “a prime example of a tax that was created to generate revenue, not economic growth”.
“If Australia is to become an innovative country and compete globally, Australian companies must be able to attract and retain the best global talent,” says Malley. “To do this, we must also offer world leading benefits.”
Malley says relaxing the regulations would allow local companies to offer the same type of employee benefits that are currently be used to “lure our best and brightest to the US and the UK”.
“These changes would enable Australian companies to offer employees a chance to share in their employer’s financial success, increase their engagements and signal to employees they really are a part of the organisation, not simply an employee,” he says.