David Coleman (Banks, Liberal Party) Share this | Hansard source

I am particularly pleased to be able to speak on this very important legislation to end this disastrous policy in relation to employee share schemes, which was implemented in 2009 by the former Labor government. It is something that I know a little about because, prior to coming here, I spent the majority of my career working in and with the Australian internet industry. I have both participated in employee share schemes and helped to design some, and I have talked with founders and employees about how these things might best be structured over quite a number of years.

It is a truism—it is something of a motherhood statement—to say that we all want the Australian technology sector to succeed. It is very, very easy to say that, and I dare say that it is a little bit fashionable to say it. The reality is that the successes of the Australian technology sector will be created by that sector, not by government. The role of government is minimal. Most importantly, it is not to make life difficult for companies that are creating value through start-up activities in our economy. Unfortunately, the previous policy of the Labor government, which we will happily undo through this legislation, created a world of pain for Australian technology start-ups.

In very practical terms, let's explain how Labor's 2009 policy change was such a disaster for the Australian start-up sector. The situation that the sector faces is that most start-up companies do not have much money. That is a pretty important starting point to bear in mind: there is not a lot of money. Therefore, it is generally not possible to attract employees by paying very high salaries. The people that Australian start-ups want to hire, of course, are highly educated, highly entrepreneurial, sophisticated employees who have the dynamism and drive to really create new opportunities, and they are people with options. Often the question that is faced by the potential employee is, 'Do I go to this interesting start-up company on a low salary, or do I go for a more traditional job, maybe in banking, management consulting or law on a higher salary?' Often, it is a materially higher salary. The argument of the star-up company to the employee is: 'We can't pay you as much as that bank or that law firm can pay you, but what we can offer you is (a) the opportunity to be part of something very exciting and building a brand-new business from scratch and (b) the possibility of being part of the success of the company, should we succeed.'

The way that start-up companies typically do that is by offering employees share options—sometimes shares but generally options. Basically, an option is a capacity to buy a share at some point in the future for an agreed price, with that price being agreed today. So it might be that I can buy shares for 50c and it might be that I can buy them in a year's time or in two years, three years, four years and so on—but the price is still 50c, even if the shares might be worth, say, $5 in four years time. That is potentially a really important benefit for an employee. It only works for the employee if, in fact, the company is successful and if the shares over time are worth significantly more than the value agreed at which the option can be exercised. Most of the time, unfortunately, that does not actually happen. Most of the time, small start-up companies do not reach the great heights that they would like to reach; and, most of the time, employees who take on those option plans do not end up making a huge amount of money from them. There are of course exceptions, when things go really well. But in all cases, even if things go exceptionally well, the employee does not actually make anything from the option until they exercise it at least one year—and, often, many more years—after it is issued.

What Labor did—and this just implausible; I find it quite extraordinary that this was implemented in 2009—was to say that, even if you have not exercised the option and you have obtained no practical financial value from that option, you should pay tax immediately, effectively, on the perceived value of the option. So the option is worth nothing in cash terms and it cannot be sold because it is in a liquid company; it really has no practical financial value. But Labor said, 'You have to pay tax on it now.' Something that, effectively, has no value to the employee becomes a millstone around their neck and something on which they have to pay tax.

So, in my example earlier, where the employer was saying, 'Don't take the higher salary'—with that bank, law firm or whoever—'take the lower salary with us,' the proposition became, remarkably and appallingly: 'Take the lower salary with us; and, by the way, you're going to have to pay tax now on share options that are of no practical value to you.' The proposition of share options went from being the quite attractive one of, 'We'll see how it goes and, hopefully, they will be worth something one day,' to, 'I effectively have to pay a penalty tax now on something from which I can get no value.' If the salary were $80,000, the tax payable might be $5,000 or $10,000 and the employee would be worse off, in a cash sense, than they would have been if there were no options granted.

It is absolutely unbelievable to me that the previous government insisted upon that policy. It is pleasing that they have seen the extraordinary folly of that policy and are supporting these changes, but it is appalling that that was ever allowed to occur. It says a lot about their lack of practical understanding of how start-ups work that the policy was ever seriously proposed, let alone implemented. What this bill does—and with great credit to the Minister for Small Business, who has pulled together this very attractive package for the start-up sector—is to basically say that you will only pay tax on share options when you exercise them. They are often exercised around the same time that they are sold as shares. Usually the time of exercise is a similar time to when you get some cash for these things, and that is the appropriate time at which to pay tax on their value. It is very simple—incredibly simple. Rather than forcing people to pay tax up-front for something that there is a good chance will have no value, ask them to pay tax when they actually realise some value and actually have some cash in their pocket as a result of making money from these share options. It is incredibly simple. It is extraordinary that we have to have this debate, and it is really remarkable that this was implemented by the previous government.

We are fortunate to have a start-up sector which, I think it is fair to say, punches above its weight in global terms. We had the first wave, of course, in the technology sector in the late nineties. Companies have gone on to be multibillion-dollar organisations, like SEEK and carsales.com.au and realestate.com.au and various others, and as we have moved through the last 15 years we have seen more and more Australian internet companies and technology companies really grow.

I was very fortunate in 2007 when I came across a company called 3P Learning for my then employer, PBL. It was the sort of company that we absolutely want to encourage in this country. The next 3P Learning will benefit from these policy changes we make today. When I found 3P Learning in 2007, it was a pretty small group of people situated above a shopping centre in Gordon, working on a product called Mathletics, which was pretty new. It had been CD-ROMs, and they had decided to try it out online. They had a few customers, but it was very early days. Through the extraordinary industry perseverance and vision of that company, they have now grown into a business which employs hundreds of Australians, is a world leader in the area of online mathematics, is listed on the Australian Stock Exchange and is worth about $350 million. It has created an enormous amount of economic activity in Australia and has created lots of well-paying jobs. Those are the sorts of businesses that we want to encourage.

In these provisions in the bill, we also provide some particular incentives for smaller start-up companies. Of course, it is not limited to the technology sector; it is start-up companies generally. There is the capacity to provide a discount on a share issue of up to 50 per cent without the employee being liable for tax on the difference between the market value of the share and the price at which those shares are issued and a number of other important provisions for the start-up sector because we all want to see this sector succeed.

I must admit I do find it a bit amusing when those opposite purport to be the friends of this sector. The 2009 changes could not have done more damage to the start-up sector if you had expressly tried to do so. If you had said, 'How can we actually make things really, really difficult for small Australian start-ups who want to grow?' you would probably have come up with an idea like this. You would probably say, 'How can we make it hard for them to hire employees?' Anyway, it was just an extraordinarily foolish idea. So those opposite really have no credibility in this space.

I have to say that it does help, when you are seeking to legislate in an area, to have some practical understanding of it, and I think those of us on this side of the House have a clear understanding of this sector and why it is so important. It is not about the government determining the outcomes. It is not about the government picking winners. It is about the government giving them the space to grow and not taxing them out of existence.

I do find the opposition's policies in this area quite extraordinary. I do not think they have learnt from their manifest failure in this area. We saw the announcement in the budget reply a couple of weeks ago by the opposition leader where he is clearly wanting to get on board this high-tech train, so to speak. Just as the former leader, Mr Rudd, would parade around holding laptops, the current opposition leader clearly wants to be seen to be associated with technology and growth, which is just ridiculous, given the record in this space. It is a concern when the opposition seeks to align itself with the start-up sector when, in the opposition, there is no practical understanding of how to run a start-up or how to build a business or anything of that nature.

The opposition leader, to much fanfare, announced the proposal in relation to the forgiving of HECS debts for STEM students in the budget reply. He said it was going to cost $300 million. At some other point it was $45 million. Then they thought it might be about $1 billion. It is actually a pretty simple calculation. There are about 100,000 STEM students in the time period. The debt of each student on average is about $22,500. So the cost is $2.25 billion. It takes probably five minutes to calculate, maybe less. But they got that wrong and showed a real lack of understanding of even the most basic statistics.

You do worry when the opposition leader stands up on budget night and says he is going to set up a smart innovation fund to invest in Australian technology start-ups. This is the same party that smashed the Australian technology sector through implementing this completely absurd tax on the payment of employee share options. The notion of those opposite running around investing in start-ups is, I think, something to give grave concern. So it would not be running around with a laptop a la Kevin Rudd. It is the opposition leader clutching a bunch of share certificates and saying, 'We're on your side.' They are not on the technology industry's side. They have made that very clear through their past record. This is very good legislation, and I am very pleased to support it in the House.

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