Australian govt pledges to right employee share scheme wrongs

Realising that former changes to the employee share scheme have negatively impacted startups, the government has said it will review the situation in order to encourage more tech businesses to contribute to the digital economy.

The Australian government has promised reviews into the Employee Share Scheme (ESS) and crowd-sourced equity funding (CSEF) in its latest update to its National Digital Economy Strategy.

The last time the ESS was examined was in 2009, the changes of which made it difficult for startups to offer their employees equity . Under the 2009 ESS, shareholders were required to pay tax on part of the value of the shares, even though they may not necessarily receive an immediate cash benefit.

But the latest update to the 2011 National Digital Economy Strategy now acknowledges that this is a disincentive to startups, and that something needs to be done to make the situation more attractive to those contributing to the nation's digital economy.

"Early stage startups usually have no revenues, and the shares or options are generally not tradeable and may have little or no value. Indeed, given the high-risk nature of start-ups, in many cases, an option may never be exercised."

Even setting up such an employee scheme has been considered a complex process, with many startups instead choosing not to provide employees with equity due to the administrative overhead associated with it.

"These complexities can make ESSs unattractive for many startups, with possible negative implications for the development of startups in Australia," the paper said.

"The feedback from the prime minister's Digital Economy Forum in October 2012 was that government should look at the framework around employee share schemes with an eye to supporting the development of startups in Australia, particularly digital startups," Assistant Treasurer David Bradbury said in a statement.

"It is, therefore, timely to re-examine the current rules to see if they are performing as expected, or whether there are areas that could be adjusted."

As part of righting its past wrongs, the government has given itself the deadline of December 2013 to consult with stakeholders on how to best tackle the problem. Challenges it hopes to solve are reducing the administration of such a scheme, determining the valuation of share options, and finding an agreed threshold at which shares should be taxed.

It also recognised that some tech startups gain their seed funding via CSEF initiatives like Kickstarter and Pozible, yet Australian corporation law may not adequately consider the rights and protections of investors and those receiving funds.

Unlike many other formal investments, CSEF is not subject to scrutiny by the Australian Securities and Investments Commission (ASIC) and its regulations.

As part of the new strategy, a review will be undertaken to determine whether corporation law adequately accounts for CSEF, and how current practices around such funding can be improved to reduce any likelihood of fraud, while encouraging the growth of startups.

"It will be important that our approach appropriately balances investor protection with commercial viability," the paper said.

The outcomes and recommendations from the review of CSEFs are expected to be published by April 2014. A consultation paper for both ESS and CSEF issues is expected to be released by the government shortly.