Paul Fletcher (Bradfield, Liberal Party, Parliamentary Secretary to the Minister for Communications) Share this | Hansard source

I am very pleased to rise to speak on the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015. It is an important bill that will improve the taxation arrangements for employee share schemes. In the time available to me, I would like to make three points. Firstly, we need to encourage start-up companies in the technology sector. Secondly, supporting employee share schemes is a key means of such encouragement. Thirdly, the previous Labor government did the opposite and effectively blocked employee share schemes. This bill will fix Labor's mess and facilitate employee share schemes.

In the technology sector around the world, start-up companies form a critically important part of the growth cycle. A start-up is a company formed from scratch, typically with the aim of commercialising some technology, such as software. It might be medical technology or biotechnology; it might be renewable energy technology. The most successful start-ups grow at extraordinary rates. Google was founded in 1998; by 2014 it was the third largest company in the world by market capitalisation. Facebook started in 2004; 10 years later, its market capitalisation is almost $200 billion.

Australia has had some similar successes. Atlassian produces software which helps software teams collaborate. Founded by two University of New South Wales graduates, Mike Cannon-Brookes and Scott Farquhar, in 2002, it now employs around 1,000 people. A recent transaction valued the company at $3½ billion. Cochlear, based in Sydney, is a world leader in hearing implant technology, with global revenues of around $900 million a year based on technology developed in Australia. I want to pay tribute today to the CEO, Chris Roberts, who has announced that he will be stepping down after a very successful tenure as chief executive.

There are three important reasons why we should encourage start-ups. Firstly, start-ups, particularly in the technology sector, have an outsized role in job creation. According to the OECD's most recent science, technology and innovation report, one-third of job creation in the business sector comes from young firms with fewer than 50 employees, even though these make up only 11 per cent of total employment. A recent report from America's Kauffman Foundation found that new business formation was 23 per cent more likely in the high-tech sector of the US economy than in the private sector as a whole and 48 per cent more likely in the information and communications technology subsector of high technology. Secondly, start-ups are particularly important as a mechanism to introduce and commercialise new technologies. In a world where economic growth and prosperity is tied ever more closely to technological progress, countries with low levels of start-up activity risk missing out on the economic growth which technology can deliver. Thirdly, if we do not have vigorous start-up activity, we risk losing some of our best and brightest to other countries which do. Already, there is a steady flow of Australians with IT skills heading to Silicon Valley or other places, where they can employ their talents and obtain rewards greater than they believe may be possible in Australia.

If we want to courage start-up companies in Australia, then ensuring that these companies are able to offer employee share ownership plans is critical. It is standard practice for start-up companies in the US and many other countries to offer employees options—that is, rights to purchase a designated number of shares in the company at a specified price and usually at a specified time in the future under what is usually called an employee share ownership plan, or ESOP. If the company does well, the market price of the shares will be far in excess of the price that the option-holding employee will pay. This can be an attractive form of remuneration for those wishing to take a risk and work hard on the creation of a new business. Equally important for a start-up with limited resources, it can issue options to employees and, in exchange, the employee will accept a lower cash salary than would otherwise be required because of the potential for a generous pay-off at a later date if all goes well.

Let me quote from the co-chief executive officer of Atlassian, Scott Farquhar, who last year, at my request, delivered the JJC Bradfield lecture on the topic 'Capitalising on the software revolution in Australia'. This is what Scott Farquhar had to say:

… the simple fact is that tax matters in attracting people; tax matters in attracting capital. And, in a global market for both, you simply can't afford to be too far off the pace … we need to fix the tax treatment of employee share ownership plans … These are a vital tool for attracting and retaining talent in the software industry. If Australian companies cannot meet the world standard for rewarding our people, how can we compete on the world stage? … ESOPs are most commonly stock options offered to employees—the rights to company shares which accrue in value as a business grows in wealth. For an employee who is considering whether to join a start-up, the option to share in future riches is needed to lure staff from the big banks and large corporate firms or from start-ups overseas.

Despite the fundamental importance of employee share schemes, Labor effectively blocked them. The previous Labor government and then Treasurer Wayne Swan demonstrated a hostility to employee share plans. They introduced tax settings which made such plans unattractive for companies to offer and unattractive for employees to participate in. The 2009 tax law changes made the issue of share options to employees of a start-up extremely unattractive. In those changes, under then Treasurer Wayne Swan, the then Labor government imposed a new rule that options would attract tax in the year they were issued. So the employee was hit with a big tax bill payable in cash in that year—an employee was issued options and then faced a requirement to pay tax in cash that year even though the options may well ultimately prove to be worthless. It is unsurprising that this tax change resulted in employee share options becoming extremely unattractive. Far from being an incentive to employees, they effectively became a disincentive.

The consequence was that Labor's policy change of 2009 effectively destroyed an important mechanism to stimulate start-ups in the technology sector. It put Australian companies in the technology sector at a marked disadvantage to the position of such companies in other jurisdictions—in turn leading to difficulties in attracting talent to technology companies in Australia. This, in turn, increased the relative attractiveness for Australian businesses of relocating to other jurisdictions.

The bill before the House this afternoon will fix Labor's mess and facilitate employee share schemes. It makes two main changes to the tax treatment of employee share schemes. First, for all companies, employees who are issued with options will now generally be able to defer tax until they exercise the options—that is to say, until they convert the options to shares—rather than having to pay tax in the year they receive the options. This will benefit employees by deferring their tax liability until they are able to realise a financial benefit from their options. Other changes that are being made for all companies include that the maximum time for tax deferral will be increased from seven years to 15 years and the maximum individual ownership limit will be doubled, from five per cent to 10 per cent. Secondly, eligible start-ups will be able to issue options or shares to their employees at a small discount and have that discount exempted, in the case of shares, or further deferred, in the case of options, from income tax. To qualify for this concession, companies must have been incorporated for less than 10 years, be unlisted and have a turnover of no more than $50 million. In addition, employees will need to hold the shares or options for a minimum of three years to qualify for the concession.

Red tape and unnecessary legal expense has been another challenge associated with employee share schemes. The government will address this by developing standardised documentation that streamlines the process of establishing and maintaining an employee share scheme and also developing a safe harbour valuation method for unlisted shares. I have been pleased to have some involvement in the development of these documents, particularly through jointly hosting a round table with representatives from the technology sector, along with Minister Billson, and it was also attended by officials from the ATO. And of course the ATO has been carrying out and has recently completed its consultation process in relation to these changes.

I should highlight that the bill also addresses some technical concerns and further clarifies policies on the start-up concession. It makes it clear that the 50 per cent capital gains tax discount will be available for options issued to beneficiaries of the start-up concession, even where the underlying shares are held for less than 12 months. This will provide a significant concession to employees who are issued with options under the start-up concession. It is also an incentive for employers to offer employee share schemes to their employees.

Let me conclude with the observation that if we want to build a strong technology sector in Australia we need a strong start-up culture. The job for government is to help create the conditions in which entrepreneurs in the technology sector and every other sector have the best possible chance of achieving the success they aspire to. This bill is a significant step in that direction, with measures to improve the taxation of employee share schemes. It is clear that employee share schemes are key to attracting and retaining talent in start-ups. In 2009 the changes that the then Labor government made to the tax law effectively halted the provision of options through employee share schemes, at least for the vast majority of start-up companies that were unable to afford complex and expensive workarounds. This bill will fix Labor's mess and facilitate employee share schemes. It will increase the international competitiveness of our tax system and will help innovative Australian start-ups to attract and retain employees. I commend the bill to the House.

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