7 July 2015

Interview with Heidi Armstrong, Sky Business


SUBJECTS: Employee Share Schemes, Crowd Source Equity Funding

This is a transcript of the Hon Bruce Billson's interview with Heidi Armstrong on Sky Business. The main topics discussed were Employee Share Schemes and Crowd Source Equity Funding.


As this financial year gets underway the Government continues to roll out its small business package. And the employee share scheme framework has really drawn positive attention. Not just for its tax incentives but also because of the implementation assistance available for start- up companies.

I spoke with the Small Business Minister Bruce Billson earlier today and asked him to explain what the new changes to the employee share scheme framework involved.


There was a whole bunch of them related to the jobs and small business package which is around incentives, a reduction in the small business company tax rate to the lowest it has been in almost fifty years.

Also, a tax discount on incomes earned by small businesses that are not structured as companies. There was the asset right-off. There was also work in relation to the agriculture sector and accelerated instant depreciation opportunities.

Alongside that was the reform, the much needed reform, of the employee share schemes. Some $200 million is being invested in fixing the harm caused by Labor’s 2009 changes, where the taxing point for options was brought forward to when the options were issued, not when the recipient had any economic advantage or material gain.

That effectively killed dead employee share schemes. Not only are we fixing that, we are putting in additional incentives for start-ups and streamlining the paper work so that complying with employee share scheme requirements is made easier, particularly for smaller businesses.


Just to clarify that, small businesses or start-ups that want to retain or attract good talent, they can now do that in more creative ways by offering options to employees and I guess without the employee having to pay income tax on that from day one. Is that correct?


That is right. If an option is issued, we have extended the holding period for those options; up to 15 years for start-ups. Why we have done that is for an early stage business, they might not be cashed up to be able to pay world class salaries for world class talent.

What they can do though, is offer those skilled and really important contributors to that business a stake in the business. So as the business succeeds, they too can benefit from that success. It is a really important incentive. It is an aspect of the start-up eco-system, if you will, where Australia had fallen behind because of Labor’s 2009 changes.

Not only have we repaired that damage but we have put added incentive there for start-ups and then streamlined the compliance and regulatory requirement of the paperwork so you can actually lift off the shelf the scheme documentation if you think an employee share scheme is good for your business.


Before we get to that, I just want to seek clarification around the issue of a start-up’s market value because most start-ups are really tricky to value at day-one. Is there a process in place for determining market valuation of the business that is offering the options?


Yes there is, there are a number of valuation options that are available and have been simplified. We have worked with the tax office to make sure the difficult task of valuing a start-up can be done in a predictable and cost effective way without additional expense.

There are a range of ways in which you can do that. Taking account of the assets or some sort of scale of economic activity or some blue-sky principles that we have got safe harbour arrangements that have been developed with the tax office to make sure there is clarity, certainty and predictability around what used to be a very difficult task of valuation.


And at the point where the employee ultimately sells their shares and realises the ultimate value of the options, I guess capital gains tax will still be triggered?


With the options, when the options are issued, that is when the tax point arises. Previously, when the option was provided and not activated, the tax point started when the opportunity for future shares was made available to an employee.

Only when that now takes effect and there are actually shares that the employee has, that is the taxation point. For people that have had shares and then seek to sell them down the track, well of course the capital gains tax arrangement applies. 

What we have done for start-ups is where shares have been issued at a discount of up to 15%, we will take that discount off  the valuation for the purposes of calculating the tax liability. That is another incentive for start-ups and that is another improvement in the system, even where it before the adverse 2009 changes.


The other thing you seem to be doing quite well is listening to the pain points of small businesses. They really do not like the red tape or paperwork, so as part of this framework, the government set up a platform with the templates to make it easier for start-ups to utilise this opportunity. Have I got that correct Minister?


That is exactly right. What we have found was some enterprises and their team, their workforce had an appetite to develop and implement an employee share scheme program. But when they came to dealing with the paperwork, the reporting, the regulatory burdens, they were overwhelmed by its complexity and in some cases, the cost.

We have sought to remove that barrier so that if there is an ambition in a workplace to have an employee share option or employee share scheme program put in place, that the compliance burden isn’t a barrier.

We have got template, off the shelf documentation to simplify that process and also greatly reduce the costs. I must put a shout out to those in the employee share scheme industry.

They have been very constructive and collaboratively coming together to develop this paperwork, these tools to make sure the great opportunity of employee share schemes where you align the business’s objectives with that of the team can be realised and made as simple and as attractive as it can be and that has been part of the reforms that we have implemented.


This all seems to be moving in the right direction, but I think the next piece of the puzzle really is around crowd sourced equity funding. Any tips on when we are going to see more details around that?


Yes, plenty of tips on that and I agree with your analysis that this is an ongoing piece of work. We need to make sure the entrepreneurial eco-system in our economy is the best it can be so that Australia is the best place to start and grow a business.

We know we have got work to do there and that is why I keep working every day, whether it is the budget package, competition reforms, things like food and grocery codes to make sure suppliers are looked after, employee share schemes, getting the tax system right, getting our regulatory authorities right. That is all part of it.    

The next step though is the crowd source equity funding. This is an important channel particularly for start-up and growth businesses to source equity injections into their business. New Zealand has got a model. Their model is quite attractive, but it only deals with publically listed companies.

As we have done a number of rounds of consultation, the crowd source community have said to me, Minister, you need to go beyond the New Zealand model. To look at privately held companies and what we can do to make sure this important, additional avenue to secure much needed capital is available. Not just for listed companies, but also the privately held, closely held group.

That is our work. In the coming weeks I will be releasing a discussion paper which will have template legislation.

We are going to seek advice from the industry to make sure we have got it right and also try to tease out, in the Proprietary Limited space what safeguards are needed so investors know what the business is about, what the governance looks like, who else is involved in this particular pitch or venture so that they can make informed decisions because it still is at the end of the day, an investment decision, largely a liquid investment decision.

One where we all know many start-ups fail to achieve greatness, many don’t make the journey. We need to make sure that investors are alert to that and are making informed judgements about the investment in a pitch that is done through a crowd source platform.


That was my interview there with Small Business Minister, Bruce Billson.