This article was published in Australian Financial Review.
The federal government will review tax barriers deterring businesses from paying workers employee shares, to lift participation in equity compensation schemes used by some of America's most successful technology start-ups.
Technology entrepreneurs including billionaire Atlassian founder Mike Cannon-Brookes have urged the government to overhaul the tax rules for employee shares and options.
Treasurer Josh Frydenberg has directed the House of Representatives Standing Committee on Tax and Revenue to launch an inquiry into the tax treatment of employee share schemes.
Committee chairman and Liberal MP Jason Falinski said the alignment of incentives of workers and owners encouraged them to share in the risk and success of a new venture.
Employee shares had been crucial to "some of the most successful and innovative companies in the world – Google, Apple, Microsoft and Amazon.
"Employee share schemes greatly support entrepreneurship and innovation while encouraging employee loyalty.
"Australia's experience with such schemes has been chequered.
"It is no coincidence that the few commercially successful technology companies Australia has produced, like Palantir and Atlassian, have ended up moving a lot of their operations to the US and listing there because the United States is the home of employee share schemes."
Technology entrepreneurs including billionaire Atlassian founder Mike Cannon-Brookes have urged the government to overhaul the tax rules for employee shares and options.
The chief executive of fintech start-up Edstart, Jack Stevens, said the 10 per cent cap on individual staff options was against the best interest of new companies.
In early stages a company might have only three or four employees, who all had a lot to contribute and were willing to forego cash to have a share in its future. At the same time the business needed to conserve cash.
"You want staff to be better aligned with the idea that this thing will be successful," Jack Stevens, chief executive, Edstart.
"It's really hard for me as a CEO. I'm trying to give staff options and the ATO is trying to tax them, so I might as well not do it," Mr Stevens said.
There were other obstacles such as the way companies calculated the exercise price attached to the options, taking staff tax into account.
Edstart works with parents to smooth school-fee payments. It has 20 staff and recently expanded to Perth.
"Reviewing how options are paid should be about alignment," he said. "You want staff to be better aligned with the idea that this thing will be successful and the more people pulling it along the better."
StartUpAus chief executive Alex McCauley said the advocacy group had been "pushing strongly" for the government to keep improving the employee share scheme system "so more companies can issue equity and options".
"We're very pleased this is on the agenda and will be making a submission," he said.
Employee shares allow small start-ups to offer employees stock or options, helping cash-strapped start-ups to attract, retain and motivate talented staff without paying high cash salaries.
Fewer than 1 per cent of Australian companies have employee share schemes and about $2 billion a year is paid through those, which is about 0.4 per cent of total wages and salaries.
Big and small employers can gift $1000 of shares to each employee earning less than $180,000, without incurring any tax consequences for the business or individual.
Workers in some cases incur an immediate tax liability when the shares or options are granted, forcing them to either sell the equity or find cash to pay the tax bill.
Employee Ownership Australia deputy chairman Andrew Clements said the tax and regulatory systems needed to "promote, not prevent" broad-based employee equity.
"The tax and the corporate rules don't support that because they've evolved without great co-ordination," he said.
The Coalition government in 2015 made tax changes to make it more attractive for start-ups to issue options to employees, reversing some of Labor's unpopular tax crackdown on employee share schemes in 2009.
The Coalition changes meant employee options and rights can sometimes be taxed at the time of sale and not at cessation of employment.
The regime is limited to a maximum share ownership proportion of 10 per cent per employee.
The Productivity Commission in 2015 raised some criticisms of the changes and recommended that employee share schemes be reviewed by June 30, 2020.
