A few excerpts from "Legislation includes extra snag for start-ups", from the November 2009 issue of Australian Private Equity & Venture Capital Journal:
Passage of the Federal Government's Tax Laws Amendment (2009 Budget Measures No. 2) Bill 2009 will damage the ability of start-up companies to attract high calibre staff through change to taxation rules on employee share plans.
Plans that currently offer either a cash or share alternative at the discretion of the employer or where the number of shares to be acquired under the plan cannot be determined until a future event, have not, until now, been subject to tax under the employee share scheme (ESS) rules until a definite share or right to a share is acquired. Such employment benefits will now be taxed under the ESS rules as though they have always been ESS interests.
According to Sally Morton, tax partner with Deloitte, many companies will find that existing plans are affected by these changes and where the award under the plan has not yet vested in either cash or shares the company may discover unexpected tax consequences for participating employees.
The legislation was initially outlined in the federal budget in May and was primarily intended to restrict the advantages of employee share plans as used by large listed companies.
[The Australian Private Equity & Venture Capital Association Limited] pointed out that such plans, and particularly the allocation of share options that were tax free until vested, were important means by which cash-strapped start-up companies could recruit high calibre staff. Changes were made but not in this area, however the government did ask the Board of Taxation to determine whether relief should be afforded to small companies including start-ups.