Dean Ramler of furniture retailer Milan Direct thinks the changes will result in more hiring. Photo: Wayne TaylorAustralian start-ups say they will consider hiring more staff and will have greater ability to compete with the likes of United States tech giants Google and Apple after the government moved to introduce changes to employee share schemes.
Draft laws released by the government on Thursday, if implemented, will remove an upfront tax on employee share schemes and provide a further tax concession for budding tech firms.
Tech start-ups said on Thursday the tax concession would allow them to take on more staff who would otherwise be attracted to the higher salaries of their Silicon Valley competitors.
“Younger start-ups like ours have less cash available, so this allows us to attract high-value talent and more of it,” Stuart Stoyan, chief executive of peer-to-peer money lender MoneyPlace, said.
“We will definitely be hiring more staff off the back of this, because it will enable us to substitute equity for salary and therefore recruit a larger team.”
Dean Ramler, founder of online furniture retailer Milan Direct, agreed the changes would result in more hiring.
“We would be able to utilise more cash for new staff, as opposed to directing that cash to senior managers.”
The government announced plans to introduce the changes in October as part of Prime Minister Tony Abbott’s National Industry and Innovation Agenda. The plan reverses a 2009 decision by Labor to tax the share schemes up front. The Abbott government’s proposed scheme gives a $200 million boost for businesses over four years.
Share schemes, popular among start-ups, allow employees to acquire shares in their company, often at a discount, as part of their pay package.
The idea is that workers have more of an interest in improving the company over time if they also have a stake in the business.
But experts say the proposed changes could be used as a way for employers to reduce wages, not hire more staff.
David Peetz, professor of employment relations at Griffith Business School, said evidence that employee share schemes drove growth was “less than convincing”.
“If you do see benefits from share ownership on employee behaviour, it tends to be where those employees have also had some role in decision making,” he said.
“If managers see this as an employment cost, they’re going to be containing their costs and you would expect employees would be getting lower wages.”
Despite intense lobbying by industry for the changes, Professor Peetz said claims that smaller and younger organisations were more innovative were sometimes exaggerated.
“You get a lot of stories in the press … saying new organisations are doing things differently, they’re more innovative, but actually there’s an awful lot of new workplaces that flounder around,” he said.
Under the new laws, companies considered start-ups will be eligible to receive a tax concession if they meet certain criteria. These criteria include being less than 10 years old and having an annual turnover of $50 million or less.
Once a company qualifies, its employees will be able to defer paying tax on share options until they sell the underlying shares, for up to 15 years.
Employees of most other companies will also be able to defer tax on options until they are exercised and converted into shares, rather than paying upfront.
Share options are often used by tech firms instead of higher salaries during the early development phase of a business, with the promise of a greater return when the company lists on the sharemarket or sells to another company.
Chris Koch, founder and chief executive of mobile data tracker Pop, said the Silicon Valley employee share scheme model was central to attracting entrepreneurs.
“The great employees out there are looking for that,” he said.
Minister for Small Business Bruce Billson said the changes, if adopted, would help small Australian companies be more competitive in the global labour market.
“We have designed these changes to increase the international competitiveness of our tax system and allow innovative Australian firms to attract and retain high-quality employees,” he said.
Shadow treasurer Chris Bowen said on Thursday he supported the draft laws but would consult certain stakeholders.
“We will be talking to the start-up and other sectors to get their feedback on the government’s draft legislation,” he said.
The government said the draft laws reflected international research that showed companies with share schemes were more productive and retained high-quality staff better than companies that did not have the schemes.
Xero Australia managing director Chris Ridd acknowledged there were risks involved for employees who took on a share scheme, but said the schemes had obvious benefits.
“It doesn’t necessarily suit everyone to have more of their remuneration based in shares, but having shares in the company is highly motivating,” he said.
The Australian Chamber of Commerce and Industry, which was among business groups that lobbied for the 2009 changes to be reversed, said the new laws would benefit start-ups and entrepreneurs.
“Allowing options to be taxed when they are converted to shares and not when an employee receives them will help smaller, innovative businesses use them to attract top talent and accelerate growth,” John Osborn, ACCI’s director of economics and industry policy, said.
The 2009 tax changes by the former Labor government were aimed at executives who try to reduce tax by channelling income into share options.
Start-ups regarded the changes as detrimental to their business model, which uses the options to attract talent instead of paying high salaries in their early years.
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