Australia’s current Employee Share Scheme is “complicated and restrictive” and the recently proposed reforms need to go much further to make it world-leading, a government-led committee has found.
The Standing Committee on Tax and Revenue, chaired by Liberal MP Jason Falinksi, tabled its report on the Employee Share Scheme (ESS) on Monday.
The committee lauded the potential of share schemes but raised concerns with the current regulatory approach, and called for a number of reforms.
The report includes two options for reform, one which would see shares under the scheme treated like capital and dealt with under the capital gains tax regime, while the other would follow changes in the United Kingdom to reduce conflicts between the tax system and corporations law.
The report comes just weeks after draft legislation was unveiled implementing a number of changes to the ESS first announced by the Coalition in 2018, along with further reforms heralded in this year’s federal budget.
These changes include the removal of the cessation of the employment taxing point for shares under the scheme, a reduction in reporting obligations and an increased cap on interest from shares eligible for relief.
The government-led committee welcomed these changes in the report, but said much more needs to be done to bring Australia into line with comparable jurisdictions, pushing for significant changes in its final recommendations.
“The changes announced by the government in the budget are a significant step forward, removing some of the most egregious barriers to the use of ESS. The [report] highlights some of the steps that could be taken to make Australia a global leader in this area,” Mr Falinski said in the report.
“The committee has recommended a number of changes to the taxation treatment of ESS to increase its usage and decrease costs for Australian businesses, and in turn increase business support, especially for startup companies, and general competitiveness, productivity and innovation.”
The committee found that current policy settings around ESS have acted to discourage, inhibit and “in most cases outright block the use of such schemes”.
“In some extreme circumstances companies cited Australia’s policy settings as reasons for listing in other jurisdictions and keeping operations out of Australia,” the report said.
A key recommendation from the report is for the Australian Taxation Office (ATO) to obtain and publish up-to-date data on ESS use in Australia, and to establish a public awareness program around the scheme to encourage uptake.
ESS use is relatively low in Australia compared to Europe and the US, the committee found, but a lack of data makes it difficult to measure its success or plan for reforms.
“The Committee was interested in hearing about the usage level in Australia and the possible hurdles that prevented a higher uptake of ESSs and limit the effectiveness of [them]. However, the lack of up-to-date data made it a difficult picture to paint,” it said.
The ATO currently only has data most recently from 2017, the committee found.
“Legislation and policy regarding ESS continues to be strengthened and refined, with the most recent changes being well received. However, the Australian government’s ability to measure the effectiveness of recent measures is hampered by a lack of up-to-date data,” it said.
“The committee is concerned that the ability to review the recent effects of changes to ESS policy is impeded by a lag in the data produced by the ATO. The committee is of the view that more up-to-date data is needed to ensure policy changes are having the intended effects, and to allow the government to enact timely reforms if needed.”
The committee urged the government to expand the definition of a startup under the scheme to include listed companies that meet the rest of the criteria, and to remove the aggregated turnover test entirely.
To qualify for the startup exemption under the ESS, a company currently has to be unlisted and with aggregated turnover of less than $50 million annually. But this test is “arbitrary and causes unintended consequences”, the committee said.
Under the current rules, an employee receiving shares under an ESS is eligible for an exemption on the first $1000 received. This threshold should be increased to $50,000, the committee said.
The taxation point on the cessation of employment should also be removed, the committee said, something which will be achieved through the draft legislation the government is currently consulting on.
The requirement for a maximum 15 per cent discount under the startup regime should be scrapped, while the ATO should ensure that documents relating to the scheme are simplified and kept to two pages, and a one-stop shop approach for ESSs should be adopted, the report said.
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