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ESS changes likely to help start-ups

November 2014

The Government has issued a media release that has given some encouragement to business owners seeking reform of the tax treatment of Employee Share Schemes. 

While we're not fans of tax change via media rather than legislation, the announcement does recognise restrictions of the current rules on many companies and seeks to do something about it.

What is an ESS? 
Recent international research shows that when employees have an ownership interest in a business, they tend to be more productive than those who don't. 

Employee share schemes (ESS) are often used to attract and retain high quality talent in innovative start-ups by giving them a financial stake in the planned future success of the business.  

While there is no draft legislation issued at the moment, the early indications are that the proposed reforms will take into consideration many concerns raised by Australian start-up companies and their advisors. 

What does this mean for current and future ESS arrangements? 
The announcement proposes a number of changes to ESS rules, including:
  • Special concessions targeted at shares issued by eligible start-up companies, such as those with turnover not exceeding $50 million, unlisted and incorporated for less than 10 years; 
  • Employees of eligible start-up companies can potentially defer tax until the underlying shares in the business are sold, with the entire amount taxed under CGT rules;
  • Employees who are issued with options under a deferred tax scheme will be able to defer tax until the options are exercised (rather than when the options are received). 
  • The maximum time period for deferring the taxing point will be extended from the current 7 years up to 15 years
The Government has indicated some parts of the current ESS rules would not change, such as:
  • The 'integrity' provisions and ESS reporting rules from 2009
  • The existing up-front tax exemption for the first $1000 of ESS interest gifted to an employee who earns less than $180,000 year. 
For the entrepreneurial start-up sector, the changes have been broadly welcomed, because it is critical to be able to incentivise employees where there is limited cash flow.

The new rules are intended to apply to shares or options provided from 1 July 2015.

If you'd like more information about Employee Share Schemes, contact us on 02 9957 4033 for more a confidential discussion.  


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Last updated November  2014. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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Disclaimer

This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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