Startups win reform in Abbott's competitiveness agenda

Abbott to reverse Labor policies that restricted use of employee share options

The Australian government will reform how employee share options are taxed to make it easier for startups to attract and retain talent, as part of a $400 million Industry Innovation and Competitiveness Agenda unveiled today by Prime Minister Tony Abbott.

The legislation will come into effect 1 July 2015, following consultations between the Treasurer and industry.

The government will reverse tax rule changes made under Labor in July 2009 that have discouraged Australian startups from providing employee stock ownership plans (ESOPs) to employees, said Abbott. They required that the employee is taxed on the value of the share option when it is issued, before any payments are made.

“They are a very important way of getting clever people into startup businesses,” Abbott said.

The change will apply to all companies and mean that options won’t be taxed until the employee executes the option. This is better for cash-poor early stage startups, which can use share options as an alternative to a larger salary.

In addition, Abbott said there would be $200 million in tax incentives over four years for employee share ownership for companies with less than $50 million that are unlisted and younger than 10 years old.

“The Government will allow Employee Share Scheme options or shares that are provided at a small discount by eligible startup companies to not be subject to up-front taxation, so long as the shares or options are held by the employee for at least three years. Options under certain conditions will have taxation deferred until sale. Shares (issued at a small discount) will have that discount exempt from tax,” the government said.

“Furthermore, to give startups more time to be competitive and succeed, the Government will extend the maximum time for tax deferral from seven years to 15 years.”

The package also includes $188 million for industry growth centres that link researchers and businesses. The growth centres will be focussed on:

  • Food and agribusiness
  • Mining equipment, technology and services
  • Oil, gas and energy resources
  • Medical technologies and pharmaceuticals
  • Advanced manufacturing sectors.

The package also provides $12 million for science, technology, engineering, and mathematics (STEM) education, with $3.5 million targeted to teaching computer coding.

Abbott said the competitiveness agenda will include tweaks to 457 work visas that foreign citizens can obtain to work in Australia. The changes will make the visas “more usable”, he said.

Startup scene welcomes ESOP changes

The changes to employee share options were “long overdue”, said Alan Noble, a board member of #StartupAus, a group that advocates for Australian startups.

Many startups had aired frustration at the length of time it’s taken for the government to fix the ESOP issue.

“It’s great to see ESOPs back on the table as a form of employee incentives,” said Noble. “Under the previous rules, ESOPs became almost unusable by startup companies.”

While he said he needed to take a closer look at the government’s proposal, he said it’s “not unreasonable” to include some limits on who can use ESOPs so long as they are accessible to rising tech startups.

Noble added that funding for STEM education is critical, but must include an emphasis on technology education and not just traditional science and maths.

Jonathan Barouch, founder and CEO of Sydney-based startup Local Measure, welcomed the changes to the share options rules.

“For Local Measure, being able to offer our people share options is an important part of our incentives program,” he said.

“But under the old scheme, creating an employee share scheme was expensive, and the ongoing administrative costs are quite high. When Local Measure set up an employee share program two years ago, it cost about $20,000 to get it done. For a startup, that’s a lot money.”

“Hopefully these changes are just the start of a focused approach from government on fostering our industry.”

However, Dave Slutzkin, group CTO of Sitepoint, which spun off 99designs and other startups, said he is disappointed by a lack of tech focus with the funding for industry growth centres.

“The government seems to be aiming more money at established industries like agribusiness, mining and energy, and giving up on the chance to have a home-grown Google, Facebook or Amazon,” he said.

“We have the best-educated workforce in the world, we're graduating really strong tech people and designers, and yet the government seems to think that ignoring the Internet is the right course of action.”

Shoes of Prey co-founder Jodie Fox said it’s important for the government to target tax and education issues.

“Australia's startup scene is teeming with enthusiasm but handicapped by regulatory frameworks. Relieving some of the tax issues around a key point of leverage for new businesses is a big step towards a flourishing ideas economy,” she said.

“Improvement in the STEM disciplines along with the alleviating taxation on Employee Shares helps to address both sides of the issue. Firstly, growing technology talent here, and incentivising them to stay.”

Atlassian co-founder Scott Farquhar yesterday slammed the state of Australian policy on tech startups in a JJC Bradfield Institute lecture. He urged reform of taxing share options and several other areas.

“If we were starting Atlassian today, I think that [co-founder Mike Cannon-Brookes] and I wouldn’t have stayed here,” Farquhar said. “We would have gone straight to the US.”

Adam Bender covers telco and enterprise tech issues for Computerworld and is the author of dystopian sci-fi novels We, The Watched and Divided We Fall. Follow him on Twitter: @WatchAdam

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