Tuesday, January 15, 2013

Employee Share Options Plans at Australian Startups




  • in attracting and retaining skilled and experienced employees;

Attracting people to Shoes of Prey

Benefits of an employee share plan:



Problem with current tax policy

How to resolve this


  1. Great article and I agree there needs to be a change to make us in oz more competitive when recruiting top talent..

    Good luck with your meeting..


  2. The key is that when the employee receives a "gain" from the options / shares that is when they should pay the tax. It's ridiculous that an employee is asked to pay up from their own pocket as they have seen no additional income from the shares.

    The Cost Basis for CGT purposes, however, should still remain as the value of the shares at the time the options were issued, not the value when the options vest. (Hope that makes some sense)

    Good luck!

  3. Agree this is the main point. But I don't know that reference should be to 'sale' of the options. Usually optionholders uner an ESOP will have no ability to sell their options but if they can do, then they will receive cash and I think CGT should be payable then.

    I think the right terminology is that the option holder should not have to pay tax when the option is granted, vests or is exercised, because no cash benefit is received at that stage. CGT should only be payable when the underlying share that is received upon exercise of an option is disposed of.


  4. Hi Michael,

    Thanks for pursuing this important issue. I wrote about the same issue on my blog last year (http://techchomp.blogspot.com.au/2012/07/kickstarting-aussie-startups-stock.html) and couldn't agree more. In the US and the UK stock options are taxed at the time of _exercise_ and employers are required to withhold the income tax. I think this apporach is a good compromise. Deferring taxation until the actual sale is probably too generous.

    Alan Noble

  5. Yep. What Dan said!

    This is a massive problem affecting the Startup ecosystem in Australia. It drives experienced technical employees away from innovative young companies who desperately need their help.

  6. Good luck Michael - this is a massive issue facing Australian start-ups as we try to compete globally and locally for talent. One of the most important things that we can offer potential employees is options or equity in the venture instead of salary. The current tax system views that issuance of equity or options as income based on speculative valuations which many never be realised. Thus employees must pay tax on those shares, yet if the company goes bust the next year - they've paid tax on worthless shares. It doesn't make sense. The US approach is much better. I hope that your meeting goes well.

  7. This is perfect: "The taxation treatment of ESOPs needs to change so that employees aren't taxed on their options when they're received, instead the sale of the options should be treated as a capital gain when they're sold and a cash payment is received."

    I would also point out that a secondary effect of Australia's deficient approach to ESOPs is that it is pushing Australian entrepreneurs to incorporate in the US - which I believe would, ultimately, be losing tax revenue, export revenue and employment opportunities for Australia.

  8. If the option is NOT offered at a discount, the relevant law you're referring to does not apply. The key issue is that you have to set the exercise price at 170% of the share price to achieve this. But in a fast growing company and granting 3 years in one hit this is not a problem.

  9. Michael, thanks for taking it on. It's a no brainer in my books. As founder of new Aussie startup, SavvySME, I can attest to how hard it is already to attract talent, without been hamstrung by such a tax law when ESOP is one of the very few benefits we can offer our employees. How did you go with your meeting?

  10. I would love to hear the result of this meeting too. Issuing options without a discount seems to be the only way forward, which isn't as attractive.

  11. I couldn’t agree more with this debate. Employee Ownership Australia and New Zealand is looking to lobby Government around creating new plans for start-ups and SMEs in Australia. We are going to have an initial closed breakfast in Melbourne and we are looking for companies that have or are looking to have an employee ownership plan in their company. We want to understand the barriers and issues that companies are facing to start building the case for employee ownership changes. Our website site is www.employeeownership.com.au and our email is angela.perry@employeeownership.com.au if you are interested in being part of this process. I look forward to hearing from you.