Adam Bandt (Melbourne, Australian Greens) Share this | Link to this | Hansard source

I rise to make a few brief comments in support of this legislation, the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015. The legislation makes what can only be described as a common-sense change and that is to make it easier for people who are in a position to have start-up companies, who want to succeed and to be part of that from the ground. We know that some of the changes that have been made before attempted to strike the right balance but did not in fact do so. They did that because an up-front tax bill was essentially imposed on the people who wanted to join in on start-up companies from the beginning.

We have a significant challenge in Australia, which is to grow those sectors of our economy that are not reliant on a 'dig it up, chop it down, ship it off' mentality. To do that, we will need to create an environment and ecosystem that will support companies and businesses that put a premium on innovation. To that extent, this bill makes a sensible change. In addition to removing the up-front tax bill, it will also provide tax concessions for start-ups acquiring shares under schemes, and employees of start-ups who are issued options will get a 15 per cent income tax deduction when those options are exercised after three years.

That is a series of sensible moves. There are two things that this bill does not do, though, that need further attention. Firstly, we need to address the critical issue of how in an environment where we support start-ups we also ensure that people who are genuine employees are not forced to live on less than the income they would otherwise get if they were treated as bona fide employees. That is, we have to ensure that arrangements that are struck in the course of start-up businesses or in similar areas do not undermine the basic floor of minimum wages and conditions that people would take for granted. Under this government, we have seen the proliferation of the carving out of sections of the Australian workforce from Australian minimum standards. We see it with the use of certain kinds of visas, the contracting out and the proliferation of independent contract arrangements that could only be said to be designed to avoid minimum standards and, in that context, potentially undermine tax revenue as well. We need to address that. Sadly, this bill does not do that. There is no reason to stand in the way of this bill, but it needs further attention.

Secondly—and I spoke at the start about the need to create a supportive ecosystem—if we want to create an environment in Australia where we can grow those sectors of the economy that are based on innovation and on our intellect, then we need to ensure that research and development and innovation in this country is supported. Yet, under this government, we find ourselves spending the lowest that this country has spent on research and development and innovation since we started keeping records. We are at an over 30-year low on spending on research and development and innovation in this country. So you cannot, on the one hand, create a notional legal framework that supports the establishment of start-ups and innovation while, on the other hand, you take the axe to other tax concessions such as for research and development but also to those public institutions that helped create the environment to partner with the private sector to grow research and development and innovation in this country. We are going to need to have something to sell the rest of the world when the rest of the world tells us to stop digging, and that point may come sooner rather than later. To do that, I have to be clear that we cannot compete with China and India on wages, nor should we try to. Our advantage in Australia and in this region is going to be based on our minds. That means putting in place the kinds of investments in research and development and innovation that other countries, our trading partners, are doing. Korea or Japan have well above three per cent of their GDP being spent on research and development and are on their way to four per cent and possibly even higher, and the US has set itself a goal of three per cent of GDP for public and private investment and spending on research and development. Yet here in Australia we languish at 2.2 per cent and we are going lower under this government.

It is not enough to come up with a piece of legislation that makes a common-sense change; you also need to match it with support in the innovation ecosystem. That is something that we have seen attacked every budget time under successive governments. Every time it comes to the federal budget, governments seem to treat the R&D pool as a bit of a honey pot to dip into, and the consequence of that is that people do not see Australia as a place to continue to invest in or to start a job and continue a job. If you are a young scientist, if you are a young researcher who could be about to contribute a groundbreaking discovery, and every May you see the threat of funding cuts to research and development and then you look overseas to countries like the US or the UK where they have a stable funding environment, you understand why many of them choose to join the brain drain and go overseas. We need to stop that, and the only way to stop that will be to set Australia on a path to three per cent of GDP—something that we, the Greens, have been calling for for a while. I am glad to see that the opposition is now supportive of that. It is time for the government to get on board as well, because if we get on board in increasing our funding for science, research and development and innovation, then measures like this bill—welcome as they are—will really start to bite and we will be able to grow that sector of the new economy.

Malcolm Turnbull (Wentworth, Liberal Party, Minister for Communications) Share this | Link to this | Hansard source

The Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015 addresses one of the most damaging acts of the previous Labor government. It did not involve the wasting of tens of billions of dollars like the NBN project did, but what it did do was potentially cost Australia billions of dollars. We will never know what it did cost, but, by changing the law on employee share schemes and options schemes in 2009, what the Labor government did was to stifle innovation and disincentivise start-up companies.

The reality is that nobody knows when a new idea or a new company will be successful or not. Everyone thinks they do; they think that their new project is going to make them rich but, regrettably, most projects do not succeed, even more are pretty mediocre and only a handful do really well. But it is that eternal optimism and entrepreneurship and that spirit of adventure and innovation that drives our economy. All of the laws that we pass here and all of the great speeches we give are fine, but what really makes Australia great, and what provides the jobs and the security for Australians in the future, is the energy and enterprise of thousands of Australians. I think all of us, whatever our politics, know in our hearts that that is right.

Some people in this place think that the government can tell business how to be innovative and can provide business tips. Oddly enough, the side that thinks that is the Labor Party, which is least qualified to do so. But on our side we believe that government's role is not to tell citizens, let alone businesses, what is best, but rather to enable them to do their best. One of the important things we should do is to make sure that we remove as many obstacles to enterprise and entrepreneurship as we can; in other words, to clear the way for that spirit of enterprise to take off. That is one of the reasons the Abbott government has been so assiduous in cutting regulation and red tape wherever we can, and we will continue to do that. I hope that the governments that follow us in the years and the decades to come will do the same, because there has always been a tendency for governments to create new regulation as new issues arise, but to fail to prune away the regulation that is no longer needed or is no longer fit for purpose.

In any new enterprise, and indeed in existing enterprises, it is absolutely critical to incentivise the staff, the team; and the best way to do that is to give them a sense of co-ownership. Again, who would argue with that? One of the ways that that is done in a modern economy is to provide employees with shares or, very often, with options to acquire shares in the future. The hope is that that gives them a feeling that they have got some skin in the game and that they are not just working for wages or some cash remuneration. That is absolutely critical, particularly with start-up companies, because the reality is that, with a start-up, generally funds are scarce; what little money is available is generally going into the acquisition of necessary resources and equipment and so forth. The people are generally working for below market remuneration, and their upside is expected to come if the project is a big hit. Of course, as we know, often it is not, but sometimes it is. So hope springs eternal, and hence the ability to incentivise your team is absolutely critical.

It is practically beyond belief that something as important as this to the economy of enterprise and innovation and entrepreneurship would have been attacked by the Labor Party in 2009. The effect of the changes that were made to employee share and option schemes was that employees became liable to taxation upon being granted options and being granted rights to shares even though they had no means of realising the value of what they were being given. You would have to be very confident to go off to the bank and borrow money, take out another mortgage on your house or pay tax on some options you had been given in a start-up company. Yes, it might be the next Facebook—there is always the possibility of that—but more likely than not it is not going to be anything of the kind.

This was a change that was absolutely calculated to kill employee share and option schemes dead. If that was the intent, it worked. It was as though the previous government had asked themselves, 'What is the stake that we can drive into the heart of Australian innovation?' They found out, and it worked perfectly. Big companies could spend a lot of money on lawyers and accountants to structure things and get around the rules—there were not many that did that although I know a few did—but the start-up sector basically stopped giving their employees shares and options as incentives. That obviously reduced their ability to attract talented people and, as I think all honourable members who have taken an interest in this matter know—I acknowledge the member for Chifley sitting opposite me at the table, who on the Labor side has taken a keen interest in innovation—this became a huge issue with the start-up sector. Whenever you spoke to people in the start-up sector, particularly in the technology area, this was the one big complaint they had.

Yesterday in a matter of public importance discussion the member for Blaxland, the shadow minister for communications, referred to an Australian entrepreneur in Silicon Valley, Tan Le, and how he had been inspired by her—so he should have been; she has a really inspiring story. During my visits to Silicon Valley in recent years, and I think everyone has shared the same experience, the big complaint from Australian companies over there has been this extraordinary tax treatment of employee shares and options that the Labor Party imposed. By the way, that is entirely at odds with global practice. Everywhere else in the world, one way or another tax is paid—often at a concessional rate, but it is paid—when the employee either realises the share or the option or is able to realise it; in other words, when a share becomes liquid and tradeable. That makes perfect sense because then the employee can realise the security that he or she has been given and pay the tax. This was the biggest single concern that people had. Even though it was attacked by the technology sector, the start-up sector, from the time the changes were made in 2009—and that criticism became more and more intense—it is remarkable and tells you how deaf the Labor Party has been to the spirit of enterprise and the spirit of innovation so critical to our economic future that they made no efforts to change the law. They could simply have turned around and said, 'Whoops, we have made a mistake, let's reverse it,' but they did not.

Ed Husic (Chifley, Australian Labor Party, Shadow Parliamentary Secretary to the Shadow Treasurer) Share this | Link to this | Hansard source

We did.

Malcolm Turnbull (Wentworth, Liberal Party, Minister for Communications) Share this | Link to this | Hansard source

The honourable member opposite me says they did. That is remarkable. If the bad law in 2009 was repealed, I wonder why we are going to the trouble of debating this bill today. The Labor Party did nothing about it. They made no change to the law; they wrung their hands but we are here actually getting the changes made.

This is a very important reform, starting from 1 July, in the new financial year, that will bring the Australian regime on employee shares and options into line with global practice. It will basically ensure that there will be no up-front taxation of employee shares and options. It will increase the deferral period—the taxing point—from seven years to 15 years. There will be no taxation on the grant of an option. Taxation will occur when the employee exercises the option, and after exercising the option there is no real risk of forfeiting the underlying share and restrictions on the sale of the share have been lifted. There are special tax concessions to employees on the grant of shares and options in smaller start-up companies, and that is very important too. It shows the concern the government has. I know honourable members are familiar with these points, but eligible start-ups that have an aggregate turnover of less than $50 million, are unlisted and have been incorporated for less than 10 years will be allowed to issue shares to employees at a small discount, up to 15 per cent, and issue options on very advantageous conditions. Options that have been allocated at a discount will not be subject to up-front taxation, as I noted, as long as they are held by the employee for at least three years. That means, therefore, that employees will only have to pay tax when they actually have some value that they can realise, when they can get some cash in their pocket to pay it. These start-ups will benefit by having gains on options taxed as a capital gain and not as income and therefore taxed at the lower concessional rate.

I know, as the Minister for Small Business noted in his second reading speech, that there have been some concerns, or complaints if you like, from the industry that these changes could and should go further. There is concern that taxation is payable, or a taxing point is realised, when an employee leaves his employment. There is of course, as the minister said in the second reading speech, the right to have any tax paid refunded if it turns out that there was in fact no gain realised on the shares at the time they are actually granted and become liquid. These are fair comments, and I hope that the government, over time, will be able to further improve and refine this legislation. The important thing is that our approach to the innovation sector is one of enablement. We are making these very important changes in the bill—and we appreciate the support of honourable members for that—but we will continue to seek to improve legislation and regulation that affects start-ups and innovation generally so that, all the time, we can be proactively improving the environment for Australian innovation, upon which our future prosperity depends. In other words, none of this should be regarded as set and forget.

This is a really important first step. It is going to make a very big change to the start-up sector. It will result in thousands of additional jobs being created and millions of dollars—perhaps billions of dollars—of additional value being created in Australia. We will never know the exact numbers, but the bottom line is that anything that can enable innovation in Australia has got to be good for our economy and, indeed, for all Australians—and that is what this bill does. Together with the minister and my colleagues, I commend this bill to the House.

Ed Husic (Chifley, Australian Labor Party, Shadow Parliamentary Secretary to the Shadow Treasurer) Share this | Link to this | Hansard source

If the value of innovation to the Australian economy is to be fully realised, we need to address the concern among smaller companies, among start-ups, that larger and more established sections of our economy have had the ear of government, regardless of politics, for way too long. They believe it is easier for miners and farmers to get into a minister's office than it is for some of these firms to do so. We need to actively dispel that notion by demonstrating support, through this parliament, for changing this perception through deed not just word. It is easy for the minister and others to talk about the negatives of the previous bill—the changes that we made in government which we have acknowledged have caused the unintended consequence of making life more difficult for start-ups. We have acknowledged that not just in word but in deed. In 2013, we were the ones who kicked off the process of getting Treasury to look at how we can change the law to ensure that the impact on start-ups would not continue and would not act as a drag on innovation in this country. We started that process.

Based on our dealings with the sector, a lot of us would have preferred that that happened way earlier—absolutely. But I would point out that, as much as the coalition were very keen to see change happen, it is nearly two years since they started talking about this when they were in opposition. The Minister for Communications was talking about this issue when the coalition were in opposition. When the coalition was elected to government, a number of backbenchers said they wanted to deal with this. It took them a considerable period of time; it did not happen in the last budget. In fact, it was continually promised that action would be taken and legislation would be enacted in a speedy way. But it took a long time to happen. Why? It was because, as people know, this is not an easy area to deal with. It took a lot of work to determine how much money would be set aside by government to deal with this—and the answers were not present quickly. Despite the eagerness displayed by a number of people, including the minister, to deal with it quickly, they did not, they could not. So we can certainly play political games if you want to, but I do not think that is of any value to this sector.

What is important is seeing action. That is why the opposition is keen to work with the government in supporting this bill and making sure that it goes through so that we can move quickly to a situation where start-ups are able to offer these things as part of the remuneration package that they extend to people they want to bring on board to help them bring their ideas to life and transform the economy. There is a lot at stake. Matt Barrie, the founder and Chief Executive Officer of Freelancer.com, said: 'The fact that a 20-year-old can start a company worth $20 billion is mind-blowing.' But that is where we are at. Matt Barrie has done remarkable things, and he is absolutely right. That quote, in itself, indicates what a remarkable time it is for young Australians in this country. We are on the threshold of potentially fundamental shifts within our broader economy, and it is younger Australians who can drive it. These are not established companies, people who are long in the tooth and have built up a long list of experiences; these are young people with the guts and determination and capability to change the way the economy works. This been unleashed through the internet and through the innovation that has sprung from it. The imperative is there.

The reason I am so enthused about the sector is that they can fundamentally change and re-gear our economy at a time when we need it most. We are seeing our sources of income and economic wealth change. We have pressure on us to grow sectors of the economy other than mining. We need to see that change occur. We also need to get ready as technology slices into all those jobs that used to exist and changes the way companies work. It will put greater demands on the individual skills of Australian employees. They will not be able to get the same manual jobs and entry-level jobs that once existed. It will fundamentally alter the way that they live in the world of work. And so we need to be able to look at this sector and we need to be able to work out how we can encourage its greater growth.

And, why the fuss? It may seem that start-ups themselves—particularly when they have been mentioned so much in the last couple of weeks on the floor of the House of Representatives—are the fad du jour. But put quite simply, there is no such thing as overnight success. As Seth Godin, the marketing writer, said:

… it takes about six years of hard work to become an overnight success.

He is quite right. Look at the stories of a lot of these people: people like Jodie Fox and Shoes of Prey; Leni Mayo and the others at 99designs; Scott Farquhar and Mark Cannon-Brookes at Atlassian; and Rebekah Campbell at Posse.com—I recall all the stories she has told of the pitches she has had to make to try to get funds and support to build and bring her vision to life—and a lot of them will tell you that there is no such thing as overnight success. They have had to work at it for quite sometime.

They have been on a long pathway to this point. But in terms of start-ups themselves, they also are not just an overnight success. They are actually a reflection on the evolution of innovation. Innovation was once driven primarily by government R&D. It then went into big business and then big business outsourced it to smaller research capabilities and firms and it is now start-ups that are leading in research and development. And they can only do it, fundamentally, through a number of key ingredients. Naturally, having faith in their own ability to bring their ideas to life is one thing. But they need two other things on top of that: they need the talent and skills—people who have the know-how to help bring those ideas to life—and they need capital.

The reason this bill is so important is because it helps deal with the issue of capital. It helps deal with the issue of being able to defer in some way the pressures that might exist on a start-up in being able to stump up money quickly and being able to funnel it through remuneration. For instance, those start-ups that do not have the money there to pay people for the talent and skills that they bring to that start-up can defer that wealth creation by providing options—shares or some sort of equity in the start-up itself. That is how these share schemes and options have arisen.

In 2009 there was an intention to deal with the attempt by bigger businesses to change the way they remunerated their executives—basically by paying them through options and share schemes, and not having salary packages structured in the way that they were. That was the intent. The unintended consequence was that it affected start-ups who wanted to be able to issue these options. It was something that had a terrible impact on start-ups. Certainly, a number of us have acknowledged the impact that existed for these start-ups and this is the big reason why we have been keen to support a change. As I said earlier, we started that process when we were in government. It has now been picked up by this government and we support the move.

We certainly recognise the range of things that this bill seeks to achieve. For example, deferring the requirement to have taxation paid until the actual options are exercised. There is also the provision of an additional concession to start-up companies that will target young enterprises to reactivate and energise employee share scheme arrangements, as the Minister for Small Business indicated in his second reading speech. It will also, through the types of initiatives that have been announced by the government, see the Australian Taxation Office work with industry to develop safe harbour valuation methods and standard documents that will be useful for the sector. In particular, it is targeting those start-ups with revenue under $50 million. And, as I indicated before, there is the requirement for taxation only when the value is realised. These are important steps.

I might add that I have detected, from the consultations that I have had with the start-up sector, a degree of interest by a number of listed companies. They have sought to exercise a degree of pressure on the government—which I see it resisted, and I think it is important that it was resisted—to put in place arrangements that would have benefited listed companies to a far greater extent than was proportionate or proper. The bill makes sure that a lot of this benefit is targeted to start-ups themselves. That has been very important, and it is something we should keep a watching brief on.

In making these changes, if there is a temptation—for one moment—to think that this mechanism alone will support start-ups then that is misplaced. It is quite clear that there is still a very big reform agenda that is required to ensure that start-ups will continue. As I said before, they are at the front of innovation. They are now picking up the lion's share of R&D in this country by way of what they are doing in breaking down existing business models and changing the way that a services economy like ours works—70 per cent of our economy is based on services and they are very vulnerable to disruption. They are doing a lot of work there, but there is still a lot to do.

Start-up communities certainly welcome it. I have detected this in my consultations with the community and I am sure that the Minister for Communications, sitting at the table here, has detected that, as I know he talks with representatives of the start-up community quite a lot. They certainly welcome the extra attention. But my biggest fear is that this will become a fad, and we cannot afford it to be a trend or a passing phase. Start-ups themselves are adding enormous economic value to the nation. They cannot be seen as an afterthought or a passing thought, as the shadow Treasurer said in his Press Club speech last week. They have to remain constantly in our thoughts because they will generate the jobs of the future. Every single job in the tech sector has the potential to generate five others. In the US, the tech sector—as I have indicated previously to the House—is experiencing job growth at a rate of 25 times the rate of other sectors. We cannot afford to think or believe that start-ups are simply the creators of neat or nifty apps that might have some sort of limited productivity benefit. This is the wrong way, and undersells the value of the work of start-ups in our broader economy and in our community. They generate real economic value, and we cannot afford to see them just ignored as a fad that will pass.

This is why shadow Treasurer Bowen, the member for McMahon, indicated that we will set up a Treasurer's entrepreneurial council that will ensure that the Treasurer, one of the key drivers of the development and implementation of economic policy in this country, has input at the time that is critical in the development of policy. The assistant shadow Treasurer said today that this whole area will continue, whether or not the benefits are delivered from the bill that is being debated now. That is important. I certainly welcome that initiative.

We also need to make sure that we continually address those two areas that start-ups say need attention—building up of talent in this country and being able to ensure that the next generation of people who go into the sector will have the skills and capability to do so. But we can also ensure that talent from other parts of the world come here too. That is an area that needs reform as well. We can bring back our own talent that has been developed here in Australia but is sitting in other parts of the world. For instance, when I visited the United States I was staggered to hear that 20,000 Australians work on the west coast in the sector. We need to bring them back. We need to greater support those ideas through capital. I certainly think the other area that needs reform is finding a way to build bridges between one of the largest national savings pools in the world, our superannuation sector, and the VC and angel investor community to ensure that we have greater support for ideas on the way through.

We have a lot to do in this space. This bill is important—I certainly recognise that—but it is not the final step. It is one step in a continuing journey to ensure that Australia can exercise its full potential, generate jobs for the future and make an impact on a world scale.

Sarah Henderson (Corangamite, Liberal Party) Share this | Link to this | Hansard source

I rise to speak on the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015. This bill, like so many of our other initiatives in our budget handed down on 12 May, reflects our government's strong focus on jobs growth and opportunity. This bill recognises that small businesses cannot grow and prosper and become bigger and more successful businesses unless they get the right start. Just consider how quickly the world is changing. This is something about which the Treasurer has spoken often. Facebook is the biggest media company in the world and it does not employ a journalist. Uber is the biggest taxi company in the world and does not own a taxi. Airbnb is a global accommodation giant and does not own a single piece of real estate. At the heart of their success is a great idea supported by great innovators, great financial backing and the right regulatory environments to inspire investors to invest. Great ideas do not turn into great businesses without first creating the right investment climate.

This bill is all about driving innovation by helping to build investment confidence and, very importantly, those incentives. I am delighted that this bill rights the wrong that has been a real drag on driving investment in start-ups. I do not say this with any sense of rhetoric at all. Just a couple of weeks ago I attended a function and spoke to a gentleman who runs a relatively new internet business. It is going well. Sales are improving. But it has the potential to grow into a very major business. He told me that he could not wait for the rules to change on 1 July when our new employee share scheme comes into effect. This will give his employees great incentive and will give him a great way of partnering with his employees to ensure that his business goes from strength to strength.

I welcome the support of members opposite on this bill. I want to particularly recognise the positive comments from the member for Chifley, who has indicated his very strong support for this bill. As we have heard in this debate, back in 2009 under the previous Labor government a number of changes were made to the way employee share schemes were taxed. One of these changes meant that the discount component of shares or options issued under any employee share scheme were taxed when the employee received those shares or options. I accept the member for Chifley's remarks that these were unintended consequences. Nonetheless, it demonstrates that perhaps the previous government did not properly consider the way in which it changed the employee share scheme, because it had a very significant and serious consequence. It meant that employees were forced to pay tax on their options before there was any opportunity to realise a financial benefit on those options.

Very importantly, the changes contained in this bill will better align the interests of employers and employees and do much to stimulate the growth of start-ups in Australia. It is incredibly important that we do everything that we possibly can to do that. Just to reiterate the main changes in the bill, for all companies, employees who are issued with options will generally be able to defer tax until they exercise the options or convert the options to shares rather than having to pay tax on those options vest, and eligible start-ups will be able to issue options or shares to their employees at a small discount and have that discount exempted or deferred from income tax. This is a very important part of our very strong support for small businesses. We are seeing a very strong realisation that, if employees can have skin in the game, it follows that they will be more involved and more interested in a company's future, working together, hand in hand, with the company owner to ensure that the company goes from strength to strength.

I think the member for Chifley said this is only one part of the solution. We have seen in our budget a comprehensive package of solutions for small business to drive jobs growth and innovation. I reflect on the 1.5 per cent company tax cut that we have announced, and for businesses which are not incorporated there is a tax discount of five per cent. They make up some two-thirds of all small businesses. These are the forgotten businesses under Labor. In the Leader of the Opposition's budget reply speech, he spoke about a five per cent unfunded discount or company tax cut that he intended to roll out, but we have heard no detail or proper commitment that that will ever happen. The Leader of the Opposition forgot that most small businesses are not incorporated. It is the sole traders, the independent contractors and the unincorporated businesses which make up the majority of small businesses. So that is perhaps one example of where Labor and members opposite have fundamentally let down small business.

Measures such as our $20,000 small business tax deduction, the instant asset write-off, have been broadly welcomed right across the Australian community. They reflect our have-a-go budget, as I have talked about often. We are encouraging businesses to go out there and spend and invest in their businesses to help grow their businesses. It is a wonderful incentive. I do have to say that when the Minister for Small Business was in Colac and Geelong last week he received a great reception. We hosted small businesses forums in both of those cities. These measures have been incredibly important in exciting the small business community. As Kylie Warne, the President of the Geelong Chamber of Commerce, said: 'We feel that small business finally has a voice.'

As a former commercial lawyer practising in intellectual property, I have to say that Australia has travelled a difficult road when it comes to supporting our innovators, our inventers, our businesses of today to become the giants of tomorrow. It is why this bill is so important, and it is why these initiatives are so welcome. I do believe the wonderful electorate that I represent, the people of Corangamite and the greater Geelong region, has the potential to become an innovation capital. I just reflect on the work of Deakin University. Deakin is now ranked 45th in the world for universities under 50 years of age. Deakin's medical school—an initiative of the previous Howard government—is doing wonders. There is incredible work happening in future fibres. Just last week we were very proud to announce a $4.7 million grant to Deakin University to establish an industrial transformation research hub. Deakin will be working in conjunction with a number of industry players, as well as with universities such as Oxford and MIT, to create a future fibres research hub. It is just an example of the wonderful innovation going on in Geelong at the moment.

We hear a lot about tech companies, but I want to reflect on the fact that innovation is not just about high-tech companies. Innovation should and is being applied across so many sectors of the economy. Advanced manufacturing is an industry, a sector, driven by innovation. We are a very proud home of advanced manufacturing, and I was delighted that Andrew Stevens, the new chair of the Advanced Manufacturing Industry Growth Centre—one of five growth centres being rolled out as part of an initiative of the Minister for Industry and Science—was in Geelong just a couple of weeks ago, holding a stakeholders round table. We are a great home of advanced manufacturing and we have great potential. That is why I am pushing so hard that Geelong become the home of the advanced manufacturing growth centre. There are wonderful advanced manufacturers like Marand, which is helping to manufacture the Joint Strike Fighter. Carbon Revolution, which are based at Deakin University, came out of some research done at Deakin university. Carbon Revolution are building carbon fibre wheels for the world; they are doing some extraordinary work. I will not hear, as I do often from members opposite, that auto manufacturing in this country is dead. I say: do not forget the 490 workers at Ford's product engineering and development plant in Geelong who are doing incredible work, high-tech work, innovative work, for the international car industry. Look at the likes of Carbon Revolution and what they are doing in supplying the global auto market: these are the global auto companies of the future. It is very, very exciting to see what is going on there.

We have also made a very strong commitment to conduct a pilot of a P-TECH in Geelong. The school is yet to be announced, so we are still waiting to hear which school has been selected; but it is incredibly exciting. This model has been very successful in America, particularly in New York, where it brings businesses together with high schools to help students develop an academic and industry path into the jobs of the future. It is a model which focuses very much on science, technology, engineering and maths working hand in hand with industry to present and provide students with those incredibly important opportunities in those sectors.

There is one missing link in Geelong. We are very proudly rolling out the NBN to some 40,000 premises across Geelong There are 35,000 by fixed line, another 2,500 fixed-wireless connections are in the planning and 2,500 are actually active. So we are again very, very quickly righting the wrongs that we saw with the disaster of the NBN under the previous government. However, I am working very hard at advocating that the rollout of the NBN be expedited in Geelong, particularly in Grovedale, Waurn Ponds, Belmont, Highton and Marshalls. These are very large growth areas in Geelong. There has been very significant growth in these areas and many residents are struggling with internet connections. So I can assure the people of my electorate, particularly in the Geelong suburbs, that I am working very, very hard at advocating an expedited rollout of the NBN

I am very proud to commend this bill today. This is a very important bill for innovators, for inventers. It reflects a strong support for small business, which is very much reflected through many of our measures in the budget. I commend this bill to the House.

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

Eric Hutchinson (Lyons, Liberal Party) Share this | Link to this | Hansard source

The government is creating the right environment for over two million small businesses across Australia. Since the coalition came to office around a quarter of a million new jobs have been created. Company registrations reached a record high in 2014. Over 280,000 new businesses were established during 2013-14. Ninety-six per cent of Australian businesses are small businesses; 4½ million Australians are employed in small business. Small business provides $330 billion of our nation's economic output annually,

The government is working to support jobs in small business. Since coming to government we have repealed the carbon tax; repealed the mining tax; delivered three free trade agreements, with China, Korea and Japan; announced $2.45 billion in annual red tape savings; established the $484 million Entrepreneurs' Infrastructure Program; created new employment opportunities through a $50 billion commitment to infrastructure; established a $6.8 billion Job Active Employment Service package; delivered a comprehensive reform package for the vocational education and training sector; introduced Restart, a wage subsidy to help Australians aged over 50 to find employment; established the Small Business and Family Enterprise Ombudsman; expanded tax concessions for employee share schemes—and we will discuss that further—begun to introduce changes to support crowd funding; and extended unfair contract term protections to small business. We have improved the balance between franchisors and franchisees, we have done a root-and-branch review of the competition framework, and we have improved government procurement policy for small business. We want to ensure that Australia is one of the best places in the world to start and grow a business. The Jobs and Small Business package announced in the budget delivers further measures that will energise enterprise and help Australians into jobs.

No-one can describe this as a fad or a trend. Since coming to government we have had in Minister Billson a minister who is absolutely committed to this sector. The address today at the Press Club highlighted the passion, the understanding, and the depth of knowledge that the minister has. Under Labor there were five small business ministers, and Minister Billson's contribution at the Press Club today was a vote of confidence in the sector. I encourage every small business employer and every small business employee to listen to that presentation today and the questions that were answered by the minister. It truly is something that will inspire and empower small businesses to know that their government is behind them. We are committed to supporting innovation and creating the right conditions for Australian entrepreneurs.

As part of that commitment we plan to improve the taxation arrangements for employee share schemes. These changes have been designed to increase the international competitiveness of Australia's tax system and allow Australian businesses to attract and retain high-quality employees in a globally competitive labour market. They are part of an extensive package of initiatives contained in this year's budget to support and encourage small business in Australia. Small business is the engine room of the Australian economy, which is why the government made it one of the cornerstones of this year's budget. Ninety-six per cent of all of Australia's businesses are small businesses, employing more than 4½ million people and producing more than $330 billion of our country's economic output annually.

I have received a huge amount of positive feedback to the $5.5 million jobs and small business package in the budget—the biggest small business package in the country's history. I could give examples. Jane Shaw at the Ingleside Bakery in Evandale and Keith Rice, who is a consultant to a number of agribusinesses around Tasmania, will be expanding their businesses and will be looking to make capital purchases to take advantage of the $20,000 instant asset write-off. At the heart of the package are tax cuts for all small businesses with annual turnovers of under $2 million. The company tax rate for those incorporated businesses will be reduced by 1½ percentage points to 28.5 per cent. Businesses that are unincorporated, which is the majority, will have a discount on their assessable income. This will improve the cash flow of incorporated small businesses and increase their capacity to engage in the economy.

Small businesses will be able to immediately deduct each and every asset costing less than $20,000 that they buy from budget night, two weeks ago, to the end of June 2017. As part of that package, the employee share schemes changes have also been introduced to boost the performance of small businesses. In the past, shares or options were taxed when they were provided to the employee. This meant that there was no real way of determining their true values, which meant that employees were hit with a substantial tax liability even though there was probably no means to generate the resources to pay it at the time. That is particularly true for start-up businesses. These amendments will mean that the tax on the options will be paid when there is an actual value on the options—in other words, when those options are exercised. Eligible start-up companies will be able to issue shares or options to their employees at a small discount, with the discount generally exempt from upfront tax. It is an incentive.

The background to this is that, in 2009, the former federal Labor government made a number of changes to the way that employee share scheme arrangements were taxed. One of the changes meant that the discount component of shares or options issued under an employee share scheme was taxed when the employee received those shares or options. The changes that we bring forward today are intended to better align the interests of employers and employees and stimulate the growth of start-ups in Australia. Not only will these necessary changes be made with this amendment legislation but the government will also develop standardised documentation that streamlines the setting up and maintenance of an employee share scheme, thus reducing red tape. This will also develop a safe harbour valuation method for unlisted shares. Small businesses grow into big businesses. It is about encouraging the entrepreneurial spirit that exists within the small business sector and knowing that there is the confidence and the support of the government to see them succeed. The Australian Taxation Office has recently completed its consultation process on both of the changes mentioned above.

Who does this impact? This will benefit employees of companies which offer such share schemes. It will make employee share schemes more attractive, encouraging more businesses to offer these schemes to their employees. Employers will also benefit from these amendments. Employee share schemes are a great way to bring the interests of employees and employers together. Employees are often the single-biggest asset that small business has and they want to keep good people. Research suggests—and it makes absolute sense—higher productivity in companies that offer these schemes.

An eligible start-up company is a company with an annual turnover of not more than $50 million, is unlisted and has been incorporated for fewer than 10 years. Shares must be provided at a discount of no greater than 15 per cent and options must not be 'in the money' when issued—that is, the option must have a strike price that is either equal to or greater than the market value of the company's shares. That is effectively the buying of puts, if you like—the right but not the obligation to exercise the underlying option at the nominated strike price. Without a tax deduction upfront, they may or may not have a value, and that is the very point: there was no incentive in start-up businesses that were offering shares or options that had that tax payable upfront, let alone the cash flow implications. There are no exclusions based on industry sectors. That is really important. There will be great opportunities within the agribusiness sector particularly to see innovation and entrepreneurial skills released because of this policy. The government has targeted the start-up concession to unlisted companies because during consultations last year stakeholders noted that unlisted companies had problems valuing their business and accessing capital.

We have seen the current tax arrangements effectively stop the provision of options through employee share schemes since the 2009 changes. We know small businesses sometimes lack the cash flow to pay salaries which allow them to compete internationally. Employee share schemes allow firms to be globally competitive by supplementing employees' salaries with equity in the company that they work for. It is the ultimate incentive and has a real and positive impact on productivity, with the ultimate reward being the success of the business, because they are part-owners in that business, as stands to reason. They are a valuable tool for employers to attract and retain talented employees—often the very best asset that new start-up businesses have, and small businesses more generally.

Unfortunately, the potential of employee share schemes has not yet been realised in Australia. We are missing out on opportunities for small business to expand and to be competitive internationally. We are not an island. Australia is increasingly competing with businesses in our region and also around the world. We want to do everything we can as a government to kick-start small business and give back as much control to the sector as possible, because they know best how to do business; they just need the tools to do it. As we have seen in the budget, it is about allowing business to do with their money what is going to be best for their businesses. We know that government will never make choices as good as small businesses will make about what is best for them.

As has been mentioned, there is still work to do, but I reinforce the fact that small business is at the heart of this government; it is at the heart of growing the economy. Ninety-six per cent of Australian businesses are small businesses and they know that they have a government that is right behind them and that is allowing them to get on the with doing what they do best.

Steve Irons (Swan, Liberal Party) Share this | Link to this | Hansard source

I too rise to speak on the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, which will make a number of overdue changes to the tax arrangements of an ESS, which will benefit both employers and employees in the short and long term.

Whether you are a member of parliament, a small business owner—I know there are many on this side of the chamber and very few on the other side—or the CEO of a large corporation, each of these people would know that attracting and retaining good employees can be difficult in the first instance but can also be the difference between success and failure. A business's employees are those who are on the front line dealing with consumers or making the products that they intend to sell, so if they are not motivated to work hard and represent your business in the same way that you as an owner would then this can be the straw that breaks the camel's back. The business could be put in jeopardy because of the lack of performance by employees. As someone who employed 16 staff at one stage, I am fully aware of the difficulties that go with employing people and keeping them motivated. The intent of an ESS is to help remove this distinct separation between owners and employees by incentivising the employees to work hard and generate growth in the business—and, of course, profit. That is why we all go into business—for the profit. It is not a charity; it is there to make a profit. I know that 'profit' is a dirty word for those on the other side of the House, especially if it is above six per cent, but that is why we go into business.

The incentive here is not necessarily a large salary each week or fortnight. In fact, the incentives of an ESS can often be in lieu of a large salary, particularly when it comes to start-up businesses, as they simply cannot afford to offer the form of remuneration for an employee's hard work that an established business or a large corporation can offer. What an ESS instead allows a business to do is to provide incentives in the form of options or shares so that employees have a vested interest in the business and its future success. As I said, this removes that owner-employee separation and instead aligns their interests so that they are now working toward the same thing— business growth and profit. No longer is this just for the benefit of the owner; it is also now for the benefit of the employee's own hip pocket as well.

As a small business owner for 30 years, I understand how competition impediments, and in particular those impediments that come in the form of a tax, can significantly hinder a business. I also know that there are some employees who are employed but, in the long run, do not suit the business's requirements and you have to let them go. But there are also those employees you do want to retain—not just for a year or two, which has become quite standard in today's employment arena, compared to 20 or 40 years ago, when you would stay in the same job for the majority of your working life. Instead, you want to retain these people for the long term. You want to keep them for 10 or 20 years and make them what we would now deem veterans in your business and part of a succession plan.

But, to give businesses this opportunity, change first needs to be implemented on a legislative level. And to achieve that, each member in this place and in the other place needs to commend the bill which is before the House. By doing so, you will be supporting business owners and you will be supporting employees across all sectors, because no industry will be exempt from the ESS changes that this bill is seeking to implement. All businesses can benefit, and all businesses will benefit if they make the decision to establish a scheme.

Currently, so many Australian businesses have stopped or shied away from establishing a scheme, for two key reasons. Firstly, as a result of amendments implemented in 2009 by those opposite, the scheme put Australian firms at a disadvantage compared to those in other countries. I have been listening to the speeches made by those opposite on the appropriation bills. I have heard some amazing speeches—you would never have thought that they had been in government for six years, because they had nothing to do with everything that is happening. It was not their fault; they were not anywhere near the balance sheet! I heard the member for Lingiari say that the 1.5 per cent tax deduction for small business was their idea. He blamed us for them not getting it through. The fact was that they canned it. They had the numbers in this place to get it through, but they canned it and then they blamed it on us. It was because of their failed mining tax, which produced nothing but trouble for Australian businesses. That is just one of the many examples we could put forward from those opposite. This is because they introduced measures which forced employees to pay tax on the options they received from an ESS—

Craig Kelly (Hughes, Liberal Party) Share this | Link to this | Hansard source

A good scheme!

Steve Irons (Swan, Liberal Party) Share this | Link to this | Hansard source

I hear the member for Hughes saying what a great scheme that was—they had to pay tax on the options they received from an ESS before they even had the opportunity to gain a financial benefit. That is like provisional tax. Paying provisional tax on an ESS scheme—what a crazy idea.

As members would be aware, employees gain this financial benefit by converting the options to shares and selling them. Even if they do not do this, it begs the question: why are they being made to pay the tax? Under this measure, employees are also paying tax on an option that is very difficult to value and could potentially not result in a benefit to the employee at all, depending on how the business fares. We on this side of the House recognise that this is not fair, it is not equitable and it is stifling businesses' ability to offer globally competitive schemes to their employees. In fact, as a result of the changes by those opposite, stakeholders have highlighted that the provision of options under these schemes were effectively ended. This was particularly the case for start-up businesses, which this government recognises as being the businesses which need the most support to ensure their future success. To combat these competition-stifling changes and to re-ignite interest in establishing an employee share scheme, the bill before the House seeks to make two central changes to the scheme's tax treatment.

The first of these amendments will effectively change the way options are taxed so that they revert to being a benefit for employees rather than a potential burden. The government will achieve this by allowing employees who enter into an employee share scheme to defer the tax they pay on the option until they actually exercise those options by converting them to shares, rather than paying the tax up-front. Another provision extends the maximum time for tax deferral from seven to 15 years. This is based on the understanding that it does take time for businesses to grow.

As I said earlier, there are employees whom businesses will want to retain in the long term, but there are also employees who can see the value in a business and will want their share in the business to be greater than what current laws allow them to share in it. To support all employees, no matter whether they work for a large corporation or a business that has just opened its doors, to make a greater investment in their workplace, this government is proposing changes to double the ownership percentage in a business that an individual can have. Currently employees can own a maximum five per cent in a company under an employee share scheme, but, thanks to the new provisions outlined in this bill, they will now be able to own up to 10 per cent. This will assist employers to attract and retain valued employees, who, in the global environment we live in, have the ability to cross not only domestic borders with ease but international borders as well. This 10 per cent threshold is also consistent with other provisions in Australia's tax laws and those of other countries.

The government has not, however, just gone out on a whim with the proposed changes in this bill. We have consulted widely across Australia and we have reviewed all submissions made by an array of stakeholders. I repeat: we have consulted wildly—widely.

Shayne Neumann (Blair, Australian Labor Party, Shadow Minister for Indigenous Affairs) Share this | Link to this | Hansard source

A Freudian slip!

Steve Irons (Swan, Liberal Party) Share this | Link to this | Hansard source

That is another word those on the other side do not understand—consulting. For them: it is just put it in the legislation and ram it through. That is all they do. I see the member for Blair is supporting the changes to the ESS; he is very excited about it.

Shayne Neumann (Blair, Australian Labor Party, Shadow Minister for Indigenous Affairs) Share this | Link to this | Hansard source

I am very excited about it.

Steve Irons (Swan, Liberal Party) Share this | Link to this | Hansard source

I know that, as someone who worked in business before, you would have loved to have a good ESS scheme to support your valuable employees. We held consultation meetings in Sydney and Melbourne, held teleconferences for those who were not able to attend those meetings and reviewed approximately 50 submissions. Following these consultations, the government also announced our policy response on 14 October 2014 as part of the Industry Innovation and Competitiveness Agenda. A further five roundtable meetings were held regarding this draft policy and one teleconference, with another 50 or so submissions received.

In response to concerns raised by stakeholders at this time, a second key measure will be implemented in the bill before the House to encourage more Australian businesses to offer an ESS. These concerns were in relation to red tape and compliance costs, which, as members on this side of the House would know, the coalition has no time for, if they unnecessarily burden business and enterprise. In the case of the comprehensive company valuations that are required to establish an ESS in Australia, this is exactly what we are seeing—unnecessary overregulation. When valuations cost $50,000 in Australia, while the costs in the United States are between $2,000 to $5,000, I think it is safe to say that the government compliance costs are strangling businesses' ability to offer competitive schemes to their employees. And if we cannot offer competitive schemes, we all know what our future will hold. Our best employees may move overseas, where they are likely to receive a better offer because they are not restricted by taxes and unnecessary compliance costs.

I am pleased to advise the House that, as a result of the extensive consultation process, other provisions have been added to the government's original draft policy to form the bill before the House. That is because the coalition understood that further reform was needed, particularly in relation to start-up businesses. As I previously said, we are a government that recognises that it is these new businesses which will need the greatest support in today's economic environment not only to establish themselves but to grow in the long term. They cannot do that without good and valuable staff; and this is a way to retain those staff. Not only do we recognise this, but we also design and implement policies that will meet these needs head on by providing a range of concessions to assist in the future success of these businesses.

Before I explain these additional concessions to the House, I would also like to highlight that it is not only through the proposed changes to the employee shares scheme that this government is supporting small businesses. In fact, the 2015-16 budget, which the Treasurer announced earlier this month, included a number of measures that give small businesses a leg up and encourage them to look at ways to grow their business. They include: tax cuts of 1.5 per cent for incorporated small businesses with an annual turnover of up to $2 million; a five per cent tax discount, up to $1,000 a year, for unincorporated businesses; and an immediate tax deduction for each and every asset purchase up to $20,000 for all small businesses. Each of these concessions will support small businesses across Australia and will give them the confidence they need to have a go and invest in their company's future. This may be through a range of measures, including taking advantage of the tax deduction and buying new equipment, employing additional staff or expanding the business into other markets.

The concession for businesses proposed under the amendments before the House specifically focus on eligible start-up businesses. Under this concession, eligible start-up businesses will be able to issue options or shares at a small discount and, if they hold the shares or options for at least three years, they will not be subject to up-front taxation. Under this concession, eligible start-ups will be those businesses which have been incorporated for less than 10 years, are unlisted and have a turnover of no more than $50 million per year. Start-up companies with venture capital investors will also be eligible for this concession.

The Minister for Small Business Bruce Billson said in this place that the discount component for options concession 'will be taxed when the employee is in a better position to fund the tax liability. For shares provided at a discount of up to 15 per cent, the discount component will be exempt from tax.' These changes, if passed in this place and in the other, will be the rules and regulations by which future employee share schemes will be assessed from 1 July this year. They will not affect existing schemes, as these have already been negotiated between employees and employers and the changes would otherwise, therefore, interfere with these contractual arrangements. Of course, businesses could opt to introduce a new scheme under which these changes would apply.

I also take time to highlight that—although this government is proposing a number of amendments to the employee share scheme in response to stakeholders feedback—we will be retaining the integrity measures that were introduced in 2009, which were designed to limit tax avoidance opportunities. We are also making it clear that the 50 per cent capital gains tax discount will be available for options issued under the start-up concession. This includes those circumstances where the underlying shares are held for less than 12 months.

The last key provision in the bill before the House that I would like to take this time to highlight is in regard to the tax that is currently levied when an employee ceases employment. This is based on the concept that, once a person ceases employment, the mutual interests of that business and the employer also cease and so too should the tax concessions they receive. Concerns were, however, raised by stakeholders that this tax is, therefore, being paid on gains that they may never realise. In response to this, the government is proposing to change the refund provisions so that income tax paid on options when employment ceases will be refundable if the option is not exercised and lapses or is cancelled.

As part of a team that supports small businesses, and we are known to support small business in Australia, and as someone who has had experience, as have many on this side of the House, this is another piece of legislation and support that this coalition government is giving to small businesses across Australia, and I commend the amendments to the House.

Bert Van Manen (Forde, Liberal Party) Share this | Link to this | Hansard source

It is with great pleasure that I rise to speak today on the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015. Employee share ownership is something that, in Australia, has been around since the 1950s, but we never hear particularly much about it. In the year 2000, the Shared Endeavours report noted that employee share ownership plans have been around for a significant period of time and have also enjoyed legislative support since the early 1970s. In that time, they also enjoyed bipartisan support.

The history of employee share plans in Australia has two facets: their evolving significance in business, where they undergo constant modification in response to global pressures being experienced by business, to contemporary business management practices as well as to changes in taxation corporation law; and the gradual evolution of the legislative arrangements and changes, which have attempted to foster employee share plans and participation in them while at the same time, understandably, limiting their use as vehicles for aggressive tax planning.

As I am sure many of the other speakers on this bill have already noted, this bill seeks to redress a number of the changes that the former Labor government made in 2009 to the taxation arrangements for employee share ownership plans. Those changes effectively put a stop to their use for the past six years. It is important in a global marketplace that Australia is able to compete with other countries such as the United Kingdom and the United States, and is able to land new enterprise opportunities here. The current arrangements that are in place impede the opportunity for that to occur. They impede opportunities for innovation and entrepreneurship in our economy. The way we have done business in the past around employee share ownerships schemes is not conducive to the commercialisation of great Australian ideas. It has not enabled the unleashing of the 'have a go' enterprising spirit that we are trying to encourage in order to grow our economy and employment potential. The changes in this bill are intent on better aligning the interests of employers and their employees, to stimulate the growth of start-ups in Australia.

Sometimes, when discussing these topics, I think it is interesting to look at a little bit of history. The importance of the aligning of interests through employee share ownership was first recognised by philosopher John Stuart Mill in 1848 when he wrote:

The form of association, however, which if mankind continue to improve, must be expected in the end to predominate, is not that which can exist between a capitalist as chief, and work-people without a voice in the management, but the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations, and working under managers elected and removable by themselves.

He went on, interestingly, to give the example of Parisian painter who had complained about the frustrations of being a business owner and being unable to get the results that he wanted from the work that his tradesman were doing. He complained that if they were working for themselves and producing that quality of work, they would be soon out of a job, so he decided to change the way that he operated his business, and introduce a yearly profit-sharing plan. It was so successful after the end of the first year that his business became one of the leading businesses in Paris, recognised for the quality of their work, and the business grew remarkably.

This is just one example of why the government—in listening to enterprising Australians through the extensive consultation that the previous speaker touched on—are taking this road to open up again employee share ownerships to the Australian business community and the employees in that community. Time and again, we have heard business say to us that the current taxation regime for employee share schemes is uncompetitive. Of the 50 submissions received, the majority of written submissions noted the changes were positive and encouraged the government to implement them. This is why the coalition will unwind the harm caused by the former Labor government's amendments to the taxation of options issued under employee share schemes. One of the biggest problems faced was that options were taxed when they were provided to the employee and there was no real way of determining their true values. This means that employees were hit with a substantial tax liability, even though there was no material capacity for them to generate the resources to pay it.

The two main changes to the tax treatment for employee share schemes are presented in this bill. Firstly, for all companies, employees who are issued with options will generally be able to defer tax until the exercise of the options, rather than having to pay the tax when those options are vested. Secondly, eligible start-ups will be able to issue options or shares to their employees at a small discount and have that discount exempt or further deferred from income tax. The other changes include the maximum time for tax deferral, which will be increased from seven to 15 years, and the maximum time for the individual ownership limit will double from five per cent to 10 per cent.

The government will address the red-tape burden by developing standardised documentation that streamlines the process of establishing and maintaining an employee share scheme. Following consultation on the draft legislation, the bill will also address technical concerns and further clarify policy on the start-up concession.

All companies in some way will benefit from these changes. Employees who are issued with options will generally be able to defer tax until they exercise their options, rather than having to pay tax when they receive them. This is a huge win for employees who were hit, as I said before, with a substantial tax liability and no way to pay it. Unwinding the changes to the tax treatment for employee share schemes will make employee share schemes more attractive and encourage more firms to offer these schemes to their employees, who will ultimately benefit if the company is successful.

It is vitally important that these amendments are introduced to allow the application of employee share scheme interests that are issued on or after 1 July 2015. Stakeholders have emphasised the preference for this to be achieved so that employers and employees can begin to benefit from these amendments. It is clear that, when employees have a stake in the business, they have a clear path of participation and control. When business leads directly to worker success, worker-owners will be willing to put forth extraordinary efforts to assure the economic success of the firm. As CentreForum, in its 2012 report Employee ownership: unlocking growth in the UK economy, identified:

There are good reasons why now is a good time to be promoting employee ownership, co-ownership and employee share ownership. Employee ownership and share ownership have been shown to improve company performance and productivity. Employee ownership reduces absenteeism, and fosters greater innovation and a longer term approach to business decisions. Greater employee ownership within the firm leads to less of a differential between the high and the low paid, and wages which are at least as high as in comparable firms.

Employee share schemes are a fantastic way to align the interests of employees with those of their employers.

I do not support the amendment. It is a political stunt from those opposite because they have nothing better to offer. However, I commend the bill in its original form to the House.

Craig Kelly (Hughes, Liberal Party) Share this | Link to this | Hansard source

It gives me great pleasure to speak on the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015. Firstly, this bill is another example of what this coalition government is doing, and has to do, to clean up the mess that we were left after six years of Labor. Before I speak on the details, it is very important to focus on the importance of entrepreneurship, which this bill goes to the heart of. It is entrepreneurship that leads to innovation, and it is through innovation that we raise our living standards. We need to create an economic environment that encourages entrepreneurship, risk taking and experimentation, and that provides reward for those people who are prepared to put their own capital on the line and have a go. That is the way we improve the living standards of all Australians. It is that innovation through small-scale experiments, time after time, with a combination of, yes, good luck, judgement and hard work that gets the innovation and the wealth creation in this country.

We have seen examples of countries where innovation fails to happen. We have seen it in countries such as the former Soviet Union, a very rich and wealthy country. They simply failed to create innovation and they went backwards. The failures of centrally planned economies are simply failures of innovation. They are not able to produce the new drugs, the new methods of transport, the new methods of communication and the new consumer products. That is what happens to a nation if you do not have innovation.

I think of one of the greatest failures of that regime. There is a famous photograph taken in a supermarket in Houston in 1989 when Boris Yeltsin, who at the time was making his first trip to the USA, made a side-trip to a small supermarket. Other Soviet leaders had made trips to supermarkets in the USA, and they always thought these were something that were set up as a dummy display to try and show how rich and prosperous the Americans were. They did not believe it. Because Yeltsin had made an unscheduled detour, he knew that this could not have been something that had been set up. The story is that he wandered around the supermarket in complete amazement. The photograph is of him looking into the freezers, seeing all the consumer products that were available to the average American and to most citizens in Western democracies. Yeltsin later wrote:

When I saw those shelves crammed with hundreds, thousands of cans, cartons and goods of every possible sort, for the first time I felt quite frankly sick with despair for the Soviet people … That such a potentially super-rich country as ours has been brought to a state of such poverty! It is terrible to think of it.

That is what happens when you deter innovation and when you deter entrepreneurship. One of the ways of encouraging entrepreneurship and innovation is through employee involvement—the employees having skin in the game through employee share schemes. That is at the heart of this bill. It has long been known that if you can get employees to have some skin in the game they will perform better. The member for Forde quoted Edmund Burke. I think I have an even better quote, from Adam Smith. Smith noted the importance of ownership and, in the 18th century, he said:

A small proprietor, however, who knows every part of his little territory, who views it with all the affection which property, especially small property, naturally inspires, and who upon that account takes pleasure not only in cultivating but in adorning it, is generally of all improvers the most industrious, the most intelligent, and the most successful.

So for several hundred years employee share schemes have been known to increase productivity.

This brings us to what Labor actually did during its six years of government. We saw many disasters, but perhaps this was one of their greatest: in 2009 they made changes to the way employee share schemes were taxed. Where a share scheme gave an employee an option, they made the tax payable upon the granting of the option, not when the option was exercised. Such an insane policy could only have been cooked up by a government run by ex-union officials—ex-union officials that believed in central planning. As was predicted by all and sundry, it was an absolute disaster. The law of unintended consequences applied—it stifled investment and disincentivised innovation and especially start-up companies. It also placed at an international competitive disadvantage Australian start-up businesses and entrepreneurs with a good idea looking for ways of raising capital to attract talented employees. The carbon tax was a tax on Australian companies—effectively a reverse carrot for producing goods in Australia. This was exactly the same—it placed Australian companies at a competitive disadvantage.

We can measure some of the damage Labor did to innovation and start-ups and new businesses. In 2003-04, Australia's business entry rate saw a total of 325,000 new companies, new businesses, start up. If we fast forward nine years to 2012-13, the last full year of the Labor government, you would expect, with a growing population and a growing economy, more business start-ups. But under the Labor government there was a 50 per cent decline in business start-ups. We were 100,000 start-up businesses less than we had been almost a decade ago, because of the incompetent policies of the Labor government. The damage done will not be known. We can put an economic cost against their wasteful destruction of resources, we can put a value on their wasted pink batts scheme and the wasted expenditure on school halls and the $900 cheques to dead people and people living overseas; we can measure the failure of their border protection and the wasteful destruction of our resources. But we will never be able to measure the damage the Labor Party did by disincentivising start-up businesses and entrepreneurs in this country. We will never know what new products, what new services and what new jobs would otherwise have been created without the economically reckless policies of the Labor government.

That is what this bill addresses—it addresses cleaning up Labor's mess in the area of employee share schemes. It does three things. It reverses Labor's 2009 changes to our tax laws; it introduces further tax concessions for employees of certain small start-up companies; and it supports the Australian Taxation Office in working with industry to develop and approve safe harbour valuation methods and standardised documentation to streamline the process of establishing an employee share scheme.

We on the side of the House understand the importance of innovation. We understand the importance of energising entrepreneurs. We understand that we must encourage risk takers; we understand that we must give them at least a level playing field so they can compete internationally. Ultimately, the money that we get here in the government's treasury simply comes from productive business enterprises. The more productive our business enterprises are, the more money that flows into government coffers, the more we have for all those important social programs.

I acknowledge the presence in the House of the Minister for Small Business, the member for Dunkley, Minister Billson. I commend the outstanding work he has done on behalf of the hundreds of thousands, if not millions, of small businesses in this country. We are slowly turning the tide around. After a Labor government under which more than 500,000 people in small business lost their job, we are turning it around—we are incentivising our entrepreneurs because that is the only way we can grow wealth in this country. I congratulate the small business minister for his efforts and I commend the bill to the House.

Bruce Billson (Dunkley, Liberal Party, Minister for Small Business) Share this | Link to this | Hansard source

Firstly, I would like to thank all those who have contributed to this debate—in particular, the member for Hughes. I am grateful for his kind words. The small business community runs through his veins and he has deep convictions about what this nation should be doing to support enterprise. I will briefly touch on the surprising and rather curious amendments from the opposition that do not actually seek to do anything in relation to the bill; they present some kind of alternative view of what perhaps should be happening in this economy but without actually go into much detail. There is no proposition before the parliament to change the legislation that the Abbott coalition government has introduced; we have got a political statement. I will touch briefly on that.

Essentially, we are here because the previous Labor government made a massive error that put employee share schemes on life support. We want to heal that harm and get the momentum back into employee share schemes and options as a great way of energising enterprise. As we have heard, in 2009 the former Labor government changed the way employee share schemes and options were taxed. This deterred the use of employee share schemes in Australia. It is an epic Labor failure that we need to fix, and we are doing that tonight. Clearly, the government is fully in support of Australia's innovation and science capacity. That is a decoy observation Labor sought to inject into this discussion and one I would like to briefly deal with given that it has been the focus of Labor's contribution—not the actual remedy and rehabilitation of employee share schemes, which is the purpose of the bill.

In 2014-15, the government committed around $9 billion to innovation, science and research. There is a $484.2 million Entrepreneurs' Infrastructure Program and a range of measures in the Industry Innovation and Competitiveness Agenda, including $188.5 million to fund Industry Growth Centres. This is all about innovation, science and research. Importantly, it is about taking those insights and discoveries and turning them into commercial activities that deliver jobs and improve living standards for our country and for our economy. The government is currently finalising its national Science, Technology, Engineering and Mathematics (STEM) plan, which will achieve tangible outcomes across the country for decades to come. Announced as part of the government's Industry Innovation and Competitiveness Agenda, this $12 million investment will improve the focus on STEM subjects in primary and secondary schools across the country. The funding will invest over $7 million to provide innovative mathematics resources for teachers and students, provide over $3 million for greater exposure to computer coding across different year levels and contribute $500,000 for an innovation-focused Pathways in Technology Early College High School (P-TECH) pilot program to help develop the next generation of innovators and graduates.

The Commonwealth government has announced new national science and research priorities to ensure our high performing science, research and innovation system delivers maximum benefit. The nine cross-disciplinary priorities are food, soil and water, transport, cybersecurity, energy, resources, advanced manufacturing, environmental change and health. These priorities will help our world-class science and research efforts to reflect the needs of industry, the national economy and the community. Taking those discoveries and research insights and better translating them into commercial outcomes for jobs and economic opportunity is very much our focus.

I will not spend any more time on that because clearly Labor was seeking not to improve this legislation but simply to make a political statement. As I outlined in my second reading speech, this bill will improve the tax arrangements for employee share schemes to make Australia a more attractive investment destination and to give start-up companies a better chance of success. This is because the Abbott coalition government understands the importance of creating good business conditions to encourage entrepreneurs to develop their companies here in Australia.

These changes which will come into effect for new shares and options issued from 1 July 2015 and build on our Jobs and Small Business package. They will provide a significant incentive for Australian companies and their employees to enter into employee share schemes and to work together to achieve synchronicity, with the goals of the organisation being aligned with the goals of the employees. We know that that produces productivity improvements and better outcomes by facilitating that common shared purpose and goal.

To facilitate the take-up of employee share schemes and options we are also producing template documentation so that the regulatory compliance task is not an obstacle to enterprises with an appetite to take up employee share schemes—being overwhelmed by the paperwork, regulatory and compliance task. It is a comprehensive package that really puts the wind back in the sails of employee share schemes and the great potential they offer our economy. That is why I commend this bill to the House with much enthusiasm.

Don Randall (Canning, Liberal Party) Share this | Link to this | Hansard source

The original question was that this bill be now read a second time. To this the honourable member for Fraser has moved as an amendment that all words after ‘That’ be omitted with a view to substituting other words. The question now is that the amendment be agreed to.

Question negatived.

Original question agreed to.

Bill read a second time.