News & Analysis

Abbott government introduces $400M industry policy, including $200M tax break for employee share schemes

- October 14, 2014 3 MIN READ

The stringent tax rules relating to employee share programmes is finally meeting its timely demise, a win for the Australian startup community. The Abbott government has today confirmed that it will introduce a $200 million tax break for employee share schemes, invest $188.5 million into innovation centres, and amend the 457 visa programme, as part of a $400 million industry plan.

The ‘National Industry Innovation and Competitiveness Agenda‘ introduced today aims to foster the creation of new startups in Australia, and drive economic growth and employment in five industries: food and agribusiness; mining equipment and services; oil, gas and energy; medical technology and pharmaceuticals; and advanced manufacturing.

Controversial changes to tax rules were made in 2009 under Labor leadership to stop high-income executives (earning over $180,000 per annum) from minimising their tax. But the tightening of tax rules also discouraged startups from providing employee share options to employees – a non-cash incentive for attracting and retaining staff in Australia.

Startups often trade equity to employees to compensate for lower salaries and high-intensity work environments. But Labor’s changes left many with an upfront tax bill on shares, even forcing some to shut down their operations.

After much anticipation, the Abbott government is now revoking rules that require employees to face immediate tax costs on share options they receive from employers. Businesses that are unlisted, have been incorporated for less than 10 years, and have an annual turnover of less than $50 million will be able to provide employee share options at a small discount that will not be subject to up-front tax, as long as the employee holds the shares or options for a minimum of three years. Employees will be able to defer their tax bills from seven to 10 years under the new policy. 

The government will also update the ‘safe harbour’ valuation tables, which are used by companies to value their options, so they reflect current market conditions, according to the agenda.

A science council will be introduced to provide advice on science and technology, while $12 million will be invested to improve science, technology, engineering and mathematics (STEM) subjects in primary and secondary schools.

“It is encouraging to see the government recognise the importance of a tech-savvy and technically educated workforce as essential to Australia’s future. Capitalising on the digital economy will only be possible if we have people with the ICT skills necessary to develop products that can compete globally,” said Alan Noble, StartupAUS board member and Director of Engineering, Google Australia.

“As studies show the best way of increasing participation in computer science is to start young, and we hope that the focus on STEM subjects is brought forward to its logical conclusion – which is to have skills like computational thinking and coding being introduced at primary school level as outlined in the new Digital Technologies Curriculum.”

The 457 visa programme will also also undergo amendments to make it easier for employers to hire skilled overseas workers “while improving programme integrity, to ensure that sponsored workers on 457 visas are a supplement to, and not a substitute for, the local workforce.”

The government will streamline the processing of sponsorship and visa applications to reward low-risk applicants, increase the sponsorship approval period from 12 months to 18 months, and provide greater flexibility in English language testing to ensure the standards are appropriate for their industry. The government will cap the income of skilled overseas workers at $53,900, but will review this within the next two years.

The Abbott government will also expand the Significant Investor visa programme to encourage more high net worth individuals to move to Australia. One way of doing this is by introducing a premium stream for people investing more than $15 million.

Dr Jana Matthews, #StartupAUS Board Member, ANZ Chair for Business Growth and Director of the UniSA Centre for Business Growth welcomes “any moves by the government to foster investment in startups”.

“While anecdotal evidence and recent funding news would suggest that there are rising levels of venture capital being invested into startups, the reality is that Australia still lags behind other developed nations, including our regional neighbours such as South Korea, Singapore and New Zealand,” she said.

The Australian startup community has been swift to commend the changes made by the current government, though some remain grounded, acknowledging that this is a first step to correct the market failures that create barriers to new high growth ventures.

“The fact that the hugely damaging regulations around ESOPs for startups are finally being changed is hugely positive, and the Government should be rightly commended for doing so. The Governments move to streamline and improve the visa process is also a very positive move, as Australian tech startups are without exception unable to recruit enough skilled ICT workers,” said Peter Bradd, #StartupAUS board member and entrepreneur-in-residence at Fusion Labs.

“However, the Competiveness Agenda is but the first step of many. There is still a huge amount of work to be done, but this hopefully signals that we are on the right track.”

Legislation is expected to come into effect on July 1, 2015 following the Treasurer’s consultation with industry.