Nassim Khadem Reporter

Nassim covers the accounting and tax rounds for BRW, as well as general business news. She previously worked for The Age newspaper covering general news, state politics and economics.

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Coalition to change Labor’s employee share scheme policy if elected

Published 03 July 2013 11:06, Updated 03 July 2013 12:44

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Coalition to change Labor’s employee share scheme policy if elected

Joe Hockey says the Coalition wants to change the rules around employee share schemes in its first term. Photo: Andrew Meares

The Coalition has revealed that if elected, it will wind back federal government changes that have deterred start-ups from giving incentives to attract talent when starting out.

In an exclusive interview with BRW, which will be published in full tomorrow, Opposition Leader Tony Abbott and shadow treasurer Joe Hockey unveil the Coalition’s key plans for business.

Hockey says Labor’s changes to the taxation of employee share schemes have put a handbrake on start-ups, and that if elected, the Coalition will wind back Labor’s policy in its first term.

Labor announced changes to the taxation of employee share schemes in 2009. In May, the then communications minister Stephen Conroy announced a welcome review of the scheme, but the 2009 change has made it harder for start-ups to survive.

Share options are often used instead of higher salaries during the early development phase of a business, with the promise of a greater return when the company lists on the sharemarket or sells to another company.

Before 2009, employees could defer the tax on shares or rights for up to 10 years, but Labor’s changes mean that tax must be paid immediately.

“Quite clearly, the feedback we’ve been getting is that this is a massive handbrake on start-ups in Australia,” Hockey told BRW. “And in so far as we don’t know, as Tony [Abbott] said, what we will inherit, this is an obvious area for change.”

Asked if it will be in his first term, he confirms it will. “This is an area where there is obviously a gaping hole in the government’s credibility,” Hockey says. “So many start-ups have remunerated their senior employees with share options and the Australian Tax Office is now hitting them with a tax liability for what they may receive, rather than actually what they have received.”

Hockey says start-ups need capital for investments. “It’s needed to get the widget to market,” Hockey says. “People want skin in the game. Everyone hopes to be part of the next start-up Apple, start-up Microsoft or start-up Google.”

Start-ups welcome promise

The promised change has been welcomed by the start-up world, although business says much more needs to be done to encourage a thriving entrepreneurial community in Australia.

The company that won the start-up award for Victoria at last night’s Telstra Business Awards, health.com.au, has had a rough ride in attracting $34 million in funding since its inception last year.

Chief executive Andy Sheats, who has previously ran several start-up companies in San Francisco, says in Australia venture capital investors “won’t talk to you” unless the company has already generated about $30 million to $50 million from other sources such as friends and family.

“It’s partially cultural, but it’s also because of Australia’s current tax laws and practices,” he says.

Sheats says Labor’s current policy on employee share schemes “makes no sense”. “Going back to a process of allowing companies to offer [share] options is important, and while it’s not the only policy change needed, it would be very helpful,” he says.

Taxing start-ups on employee share schemes is like deterring young Australian athletes from winning Olympic gold medals. “Options are one of the most effective ways to provide incentives for your staff,” he says. “Companies are like that 15-years-old kid trying to win a gold medal – there’s years of hard work before you might win.”

We should be more supportive of start-up failure

Other start-ups have previously told BRW that reaching Silicon Valley status will involve much greater government support and cultural change.

As the president of San Francisco-based start-up Kaggle, Jeremy Howard, told BRW, Australia is far off from creating its own version of Silicon Valley because its political leaders and business community are risk-averse.

“The appetite for supporting risky but high-potential investments in Australia is just not there yet,” he said. “. . . It will require a total rethink of the way we do things. It would require the [Australian] government to be very proactive about being start-up friendly. It would require help from venture capitalists that are interested in supporting these kind of companies.”

Sheats also agrees a cultural shift is needed and says Australia’s tough insolvency laws make it hard to take risks

“In the US start-up culture there’s a popular saying of ‘fail fast’,” he says. “It means take the big risks upfront and decide if it’s going to work. Failure is often a step to success. You’ve got to fail to learn.”

He says for that reason, Silicon Valley remains more attractive than Melbourne and Sydney for start-ups. “It’s a cultural thing, but in Australia that same mindset isn’t there,” he says. “So it’s not just about government regulation; it’s also cultural. I don’t think we can count on any government create a start-up culture, but we do need to be able to count on them to create an environment to allow it to happen.”

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