Senate passes ESS laws

The Minister for Small Business, Bruce Billson, is “pleased to see the Senate pass new laws to improve employee share schemes and provide the start-up sector with a massive boost”.

The Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 took effect from 1 July 2015. Put simply, options were previously taxed when vested to the employee. This meant employees were hit with a substantial tax liability upfront, even though there was often no material way to pay, for example, by selling the underlying share.

Most significantly, the change means the tax on the options can be deferred for up to 15 years or until the option is converted to a share, when the value can be easily calculated.

Many commentators in the start-up sector have lauded the changes, which have been mooted for up to six years. Many suggest that high potential start-ups have moved offshore in the past to achieve employee participation and that this change will lead to keeping many more start-ups in Australia. Of course it means that the potential wealth generated by such start-ups will be shared with many of the key employees of the businesses and that it has been seen that often this wealth is used to generate further successful start-ups.

Negative commentary has mainly focused on the fact that the tax breaks are only for small start-ups. Excluded specifically are listed companies, those with turnover in excess of $50 million or those that have been incorporated for more than 10 years.

It is viewed that these exclusions will disadvantage many of Australia’s high-growth start-up companies.

The legislation details exclusions and conditions, which mean that expert advice may be required  to ensure scheme compliance.

To learn more about the Australian Institute of Company Director’s position on this issue, read our policy submission.