ESS changes to buoy start-ups

Changes to employee share schemes (ESS) proposed by the federal government will significantly improve Australian start-ups’ ability to secure top global talent.

The current rules impose income tax on employees at the time they are granted shares or options, rather than when the options are exercised or when the shares are sold.

Under the proposed changes, the taxation of rights (including options or performance rights) granted by all companies will be deferred until they are converted into shares.

For employees of “eligible start-ups”, tax on shares and options issued at a yet to be defined “small discount” can be deferred until sale, with the maximum period for deferral extended from seven to 15 years.

In order to be eligible the company must be unlisted, have under $50 million turnover, and be in its first 10 years of business. Start-up employees will also need to hold their shares or options for at least three years to qualify for tax deferral.

The changes have been broadly welcomed by the entrepreneurial start-up sector, for whom incentivising employees with equity is critical, due to limited cash flow.

“While we welcome any changes that improve the current ESS, we believe the proposed measures can be broadened to include other unlisted companies and smaller listed companies still in start-up phase,” said Thomas Isbell, national head of global mobility services at Grant Thornton Australia.

The legislation is set to come into effect on 1 July 2015.