Jim Chalmers (Rankin, Australian Labor Party, Shadow Parliamentary Secretary to the Leader of the Opposition) Share this | Hansard source

I am pleased to speak on the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015. I am particularly pleased to follow my great colleague, the member for Charlton, who spends a lot of this time working up and thinking about innovation policies. He is one of the authorities on our side of the House in these matters. It is a pleasure to follow the member for Charlton, but when it comes to the member for Fisher, who is leaving the House now, it is fair to say that his side is so desperate to look for division and disunity that he seems to have missed him the point that we are supporting this bill. Our amendment concerns a related matter, but we are supporting the employee share schemes bill, which makes changes to the tax arrangements for share schemes to incentivise firms to introduce such schemes and to encourage more employees to participate in them.

I have been following this debate in the House, and it is worth providing the context for this decision. In about March last year, the Labor opposition called upon the government to reconsider the employee share scheme legislation to better support entrepreneurs. There is some history to this measure of course, and I played some part in it when the original changes were made in 2009. It is worth putting on the record that if that decision were taken again, we would not go down the path we went down. I am very pleased therefore that Labor is supporting the changes proposed by the government. We are also pleased that some of the important integrity measures that we put in place in 2009 are being retained by the government. The original purpose of the 2009 changes was to ensure the integrity of the scheme and so maintaining those measures is good. I acknowledge that changing the taxing point for employee share schemes is an important initiative, and I will come back to the taxing point issue in a moment.

In my contribution, I want to focus particularly on smaller and start-up firms for three reasons. Firstly, larger companies have the means to compete for employees in other ways. Secondly, the valuation of shares and options for larger companies is immediately more obvious than for start-ups—so the taxation treatment and timing is less a problem. Thirdly, the bill itself explicitly singles out start-ups with the start-up tax concession, which the government is introducing. As I said, we are pleased to be supporting the legislation. We have moved an amendment which notes, outside this area, sub-optimal performance by the government when it comes to investing in science and technology but we do support the specific measures in this legislation.

Speakers from both sides have acknowledged that innovators face difficulties when trying to get a product off the ground. We know that founders take all of the risk of the new venture: they quit their jobs, work for no pay and leave themselves open to financial risk. At the same time we have also heard the famous start-up success stories—think about Bill Gates or Steve Jobs and Steve Wozniak involved in Apple. Closer to home, think about Greg Ellis and Sean Teahan, who mowed lawns at odd hours for two years while they put every cent they had into developing the small-loan platform called Nimble. These well-known stories remind us that there are huge risks involved with innovation, but there is no doubting that the rewards for success can be substantial as well—and not only for the individuals involved in the start-ups but for the broader economy too. If we are to succeed in the 21st century as a nation, it is crucial that we benefit from the sum total of all the effort, enterprise and entrepreneurship that goes on around the country.

PricewaterhouseCoopers estimates that the Australian text start-up sector alone has the potential to contribute $109 billion, or four per cent of GDP, to the Australian economy and 540,000 jobs by 2033. But, as they say and we agree, this will require a concerted effort from entrepreneurs, educators, the government and corporate Australia. It is part of what this bill wants to achieve. One of the major difficulties that start-up companies face at the moment lies in attracting employees. As a business starts to grow, new employees need to be hired, and it is hard for start-ups to compete with the established companies for employees; they cannot hope to match the salaries, bonuses and work conditions that companies like Google or Microsoft can offer to employees. We need to offer employees equity in the company as a supplement to wages, and that is what this bill promotes—employee share schemes.

It is important to understand that such offers are not usually in the form of shares, but rather options to buy shares, which is a means for protecting employees from the downside risk of shares. Options for equity are not only a good financial incentive for new employees in lieu of wages but they also give employees a stake in the business. On this I agree with the member for Fisher: giving employees a stake in the business gives people an interest in the success of the enterprise, a reason to work hard, to think hard and to make big contribution to the company.

Some schemes are really successful. In the United States there are almost 14,000,000 people participating in employee share ownership plans, which benefit employers as well. Studies in the United States have found that companies with such schemes grow 2.4 per cent faster than otherwise. US studies have also found that participants made between five and 12 per cent more in wages and had almost three times more retirement assets than workers in companies without these schemes.

If these schemes are work in the interests of start-ups, employees and the economy, why are not more of them being taken up in Australia? I come back to where I began my contribution—with the taxing point of these schemes. The current taxation system makes these schemes less attractive for employees due to the period over which the scheme is taxed. The market value of the equity given to employees can be very high, based on the valuation of the start-up. But, practically speaking, an employee is not going to want to sell their equity stake at the start of employment, and there is unlikely to be a market for such an equity. The prospects of selling equity for a start-up at a fair price are not going to be good, so the value of the employee equity is more theoretical than it is practical.

The real value of the shares or options only comes after holding them for some time. For example, Ron Wayne, one of the original founders of Apple, has been called—as others have noted in this place—the unluckiest man in the world. He drew the first Apple logo, he wrote the partnership agreement and he wrote the Apple-1 manual. In 1976, after a disagreement with Steve Jobs, he sold his 10 per cent share in Apple for $800. If he had retained his company shares, today they would be worth $35 billion. The moral of this story is that the real valuation of equity in start-ups is very difficult to make at an early stage in the company's existence.

So with difficulty in valuation comes difficulty in taxation. The current legislation charges income tax on the value of the equity at the time that the shares are granted. Or, in the case of options, income tax is charged when the option vests—when it can be exercised. That means that employees can receive a tax bill for options even when they have no cash benefit from the shares and, worse than that, even when they have no ability to derive cash benefit from the shares. That makes employee share schemes options unattractive for individuals that are not liquid enough to cover the type up-front tax cost of the option. So we do need to change the taxation point of employee share schemes again, and that is what the bill does.

Among other important initiatives, one of the most consequential changes will be that change of the taxation point. Schemes will now be established either as deferred or up-front tax schemes. Start-ups can then design schemes that suit their employees. They can have an up-front tax scheme, which attracts a $1,000 tax exemption for people with income of less than $180,000 a year, or they can have a deferred tax scheme, which attracts tax when options are actually exercised. This will make it easier for more employees to take up the scheme and will, therefore, make it easier for start-ups to attract employees. The bill will also introduce new provisions to allow for a simpler safe harbour valuation tool to make it easier for firms to value their company in order to access employee share schemes. That means that they can avoid costly valuations. Again, all of this makes it more attractive to take up employee share schemes.

Smaller start-up companies are the ones that will most benefit from the schemes and from this bill; they are also the ones who face the most difficulties in setting these schemes up. So the bill contains some provisions to specifically target smaller start-up companies through tax concessions for these schemes. So employees of small start-up companies will not be required to include any discount on ESS interests in their assessable income, and the bill sets out the eligibilities and various characteristics of that scheme and how to access it. In the time remaining, I will not go through that.

As I said, we are supporting the specifics of the bill. My colleague the member for Fraser has moved an important amendment. The amendment is important because it goes to the broader issue of investment in science, technology and innovation in our economy. If you had to think of the things that would determine the success or failure of our nation in the most dynamic region on earth, they would be our ability to innovate, keep up, train our people, and invest in science and technology as well as our capacity to benefit from change and not be a victim of change. The member for Fraser's amendment notes that, when it comes to this government, their record is poor; their first budget cut $3 billion from science, research and innovation, and this year's budget does nothing to reverse or rectify those savage cuts. The government abolished programs such as Enterprise Connect and Commercialisation Australia, and they also abolished innovation precincts. I think it is fair to say that they are now dragging their heels on crowdsourced equity funding as well—something that my colleagues the members for Chifley and McMahon, and others, have put a lot of work into and done a lot of thinking on as they lead the debate in this building on crowdsourced equity funding.

Labor is the only party with a proper plan, a forward-looking plan, for the jobs of the future, driven by science and driven by technology. As I said before, one thing above all will determine the success of this generation and the ones that follow: the ability to benefit from technological change. That means mastering the necessary skills. In that context, the commitments made by the Leader of the Opposition in his budget reply are just so crucial to the future of the country. They go to teaching kids computational thinking and getting them involved in coding, which is the language of the 21st century; making sure that our universities are graduating people who are skilled in science, technology, engineering and maths; encouraging people to complete those degrees by writing off their HECS debt, which will mean 100,000 extra graduates; and making sure that teachers in our schools are literate when comes to the language of the future.

We do want a country that is fuelled by aspiration, and we do want a country that is fuelled by economic and intergenerational mobility. We do want a dynamic economy and an economy that is powered by people who are prepared to start their own businesses. They might have an idea which they want to turn into a big job-creating enterprise, and on this side of the House we want to do whatever we can to encourage that aspiration. The future of this country and the future of its economy will be determined by people's capacity to innovate, to create new things and to create new jobs based on the ideas and their imagination.

So we will support the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015. We will support the bill, because we are interested in supporting start-up businesses, especially in the technology sector. The bill, of course, does not go far enough to make up for the government's cuts to science, technology innovation. As I said, Labor is the only party with a plan for future economic prosperity fuelled by innovation, aspiration and creativity, and that puts us in direct contrast to this short-sighted government motivated by politics not economics.

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