2.1
In Australia, Employee Share Schemes (ESS) are considered to be ‘an important mechanism to encourage start-up activity by enabling Australian employers to improve cash flows and attract and retain talented staff at lower rates of wage compensation.’
2.2
A research paper from the Office of the Chief Economist found that:
Firms with share based payments had on average a lower level of employee churn, higher wages per employee and higher labour productivity, compared to other firms of a similar size or age. This productivity difference was strongest for SMEs.
2.3
This chapter examines the benefits of ESS to individuals, employers and the economy, and the limitations that prevent businesses and the community from benefiting from the full potential offered by ESS.
Employee Share Scheme benefits
Attraction and retention of talent
2.4
According to the Department of Industry, Innovation and Science, the attraction and retention of valuable employees has been cited by Australian firms as the main reason for introducing ESS.
2.5
For example, Minter Ellison commented: ‘for start-up companies, these concessions are pivotal in enabling the start-up company to attract and retain talent at a point when those start-ups lack credit and are “cash poor.”’
2.6
StartupAUS suggested that tech start-ups, in particular, stood to benefit from ESS when recruiting staff:
In technology, where competition for talent is global and fierce, prospective employees are often able to choose from a range of high-potential employers, each of which will invariably offer a share of the company as part of the compensation package. Equity/options packages are ubiquitous in the global technology talent landscape - Australia’s ability to compete on this score is fundamental to our ability to attract and retain world class talent.
Support for jobs and businesses during crises
2.7
StartupAUS noted: ‘fundamentally, employee share schemes are about jobs,’ and using ESS ‘can help cash-strapped businesses employ more staff in difficult circumstances, driving employment growth.’
2.8
The Committee heard that companies were seeking ‘ways to defer cash remuneration payments,’ such as implementing ESS, in response to the challenges posed by the COVID-19 pandemic.
2.9
Palantir Technologies suggested that the COVID-19 pandemic ‘has definitely highlighted the need to strengthen ties between employer and employees to endure the economic impact of the virus...[and] strengthening that relationship can be done through a simple and manageable ESS regime.’
Higher productivity
2.10
Evidence to this inquiry suggests that ESS may increase productivity. For example, StartupAUS said that ‘widespread employee ownership generates higher productivity, with workers’ incentives strongly aligned with employers.’
2.11
Employee Ownership Australia noted that ‘consistently, those companies which have got whole-of-employee ownership have outperformed the ASX 200...there are productivity gains which are greater and, indeed, greater for small firms.’
2.12
The Department of Industry, Innovation and Science’s review of the performance and characteristics of Australian firms with ESS referred to a Melbourne University study, which found 75 per cent of surveyed businesses agreed that having an ESS encouraged increased productivity.
Greater entrepreneurship
2.13
The ESS deferred tax rules are largely targeted at start-up companies, in an effort ‘to encourage greater entrepreneurship and so that good ideas can be commercialised in Australia.’
2.14
ESS are particularly important for encouraging the development of technology firms, as ‘globally, technology firms heavily utilise equity-based compensation, so it is no surprise that this is an issue of importance to Australian companies in this sector.’
Fairer distribution of economic gains
2.15
It was suggested during the inquiry that ESS could assist with sharing the financial benefits of a successful business.
2.16
StartupAUS noted that ‘in an era where successful high-growth private businesses regularly deliver polarised wealth to founders, sharing company ownership broadly among the employee base can distribute the gains more evenly and spread the economic value much more quickly through the system.’
Measuring usage of Employee Share Schemes in Australia
2.17
Despites the apparent benefits generated by ESS for businesses, their employees and the economy, ‘the incidence of ESS in Australian firms is growing but appears low relative to European and US firms.
2.18
In 2014-15, ‘ESS payments grew to just over $2 billion in 2014–15 accounting for approximately 0.4 per cent of total wages and salaries in Australia.’
2.19
In comparison, in the 2014 – 2016 period, 3.6 per cent of the United Kingdom (UK) population held some form of employee shares. However, the uptake in the UK is still considered to be relatively low with just over 13,000 companies operating some form of tax-incentivised ESOP [Employee Share Ownership Plan].
2.20
The Committee was interested in hearing about the usage level in Australia and the possible hurdles that prevented a higher uptake of ESSs and limit the effectiveness of the Tax and Superannuation Laws Amendment (Employee Share Schemes) Act 2015 (2015 Act). However, the lack of up-to-date data made it a difficult picture to paint.
Lack of up-to-date data
2.21
One of the difficulties with determining the extent of ESS use in Australia was said to be the lack of published data on the subject. Professor Andrew Pendleton advised:
Unfortunately, there is very little hard information available to assess either the take-up of the start-up concessions or whether the use of options/shares granted under the concession contribute to the achievement of broader policy goals. The ATO do not routinely publish statistics on the take-up of share schemes by companies or individuals. Nor, to date, has there been any government-conducted or sponsored research on the start-up concession and its outcomes.
2.22
Treasury advised that taxation statistics for ESS use by number of employees were updated annually, but that tax data was produced on a delayed basis to allow individuals enough time to lodge their returns and for the Australian Taxation Office (ATO) to quality assure the data. Yet, they were able to provide up-to-date data to inform ESS changes in the 2021 Budget. The Committee was surprised and found Treasury’s costing of the changes to ESS in the budget curious.
2.23
According to Treasury, access to the ESS tax exemptions and deferrals are ‘up from 2015’:
In 2015-16, there were 182,000; that's gone up to 187,000 in relation to the upfront schemes. For the deferred schemes, there were around 72,000 in 2015-16 and 74,800 in 2016-17.’
2.24
Treasury acknowledged that as there was ‘only two years of data to identify what’s happened since 2015’ and that they ‘haven’t got a great sense of the take-up.’
Awareness of Employee Share Schemes
2.25
Evidence presented during this inquiry suggests that the uptake of ESS could be improved by assisting businesses and employees to access relevant information and resources.
2.26
The Taxation Law Committee of the Law Council of Australia (Law Council) emphasised the need to promote employee ownership and the need for a ‘better understanding of what's available in the market, better understanding by business, more targeted development of programs that business can use and a coordinated body which promotes employee equity.’
2.27
Succession Plus told the Committee:
Unfortunately, in Australia, ESOP is not widely known, understood or utilised…business owners generally are unaware of ESOP as a strategy, believe it is expensive and/or complicated and perceived to be mainly for listed companies/larger corporates.
2.28
The Department of Industry, Innovation and Science similarly reported that large and very large firms (with more than 200 employees) are three to five times more likely to have an ESS than smaller businesses.
2.29
However, Treasury reported that ‘the ESS component of total remuneration is on average 4.5 times higher for small and medium enterprises’, indicating that while larger firms use ESS more frequently, they are more important for small and medium firms.
2.30
By contrast, the Inspector-General of Taxation and Taxation Ombudsman reported:
We have been informed in our discussions with professional stakeholders (undertaken at the request of the Committee), that there is a broad spectrum of the business market accessing the concessions. One stakeholder estimated that about 50% were very small businesses with (say) less than 5 employees but the remaining 50% were larger businesses, with many more employees and some at the upper limit of the turnover eligibility criteria. The stakeholders that we spoke with did not believe there are any particular market segments which have a predilection for employee share schemes.
How does Australia’s usage of Employee Share Schemes compare to other countries?
2.31
According to Guerdon Associates:
Australia needs to step up and, at least, provide taxation that is comparable. Why relocate to Australia when our existing, entrepreneurial, high growth listed entities needing more scale can only offer equity taxed at a 49 per cent marginal rate when Singapore offers 20 per cent, the US 25 per cent, or the UK, under its various schemes, as low as 15 per cent.
2.32
However, the Committee felt that Treasury continued to cast doubt on the benefits of ESS by noting that it is ‘hard to compare specific elements of different countries’ tax systems as ‘tax systems across countries vary in fundamental ways, including the rates and thresholds of the personal income tax system, retirement income schemes and concessions, and the taxation of capital gains.’
2.33
However, as ESS usage in Australia remains below that of the United States of America (USA) and the UK, it is helpful to examine the taxation and regulatory systems of these jurisdictions, which reportedly have substantially stronger tax incentives and more conducive regulatory frameworks to encourage ESS.
2.34
Stripe, a global technology company told the Committee that in their view the current tax rules in Australia are ‘not as attractive for [their] company to grow its footprint in Australia as they are in other jurisdictions around the world.
2.35
Whereas in the USA, the National Centre for Employee Ownership reported that in 2018 there were 6,416 companies using an ESOP, with 14 million participants and total assets of over $1.4 trillion. An average of 263 new ESOPs are created each year.
2.36
Succession Plus noted that ‘the US is seen as the leader of employee ownership with ESOPs emerging as early as the 1920’s.’
2.37
The USA has two types of stock options: statutory stock options and non-statutory stock options. Each type is provided under either an incentive stock option (ISO), or an employee stock purchase plan.
2.38
Statutory stock options must be provided to employees of the company. There are rules that prevent the transfer of the option and determine how long the option must be held for. Where the requirements of a statutory stock option are not met, then the rules relating to non-statutory stock options apply.
2.39
The UK’s approach to ESOPs typically involves the implementation of a discretionary trust structure, with the trustee being a company limited by guarantee. There are no allocated shares held in the trust, and no beneficiary has a specific interest in any of the trust cash or shares. Periodic voluntary contributions from the company to the trust are not liable to tax.
Committee comment
2.40
The Committee heard that ESS have several important benefits for the business community, employees and the economy in general, hence successive Australian Governments have encouraged their use.
2.41
Legislation and policy regarding ESS continues to be strengthened and refined, with the most recent changes being well received. However, the Australian Government’s ability to measure the effectiveness of recent measures is hampered by a lack of up-to-date data.
2.42
The Committee is concerned that the ability to review the recent effects of changes to ESS policy is impeded by a lag in the data produced by the ATO. The Committee is of the view that more up-to-date data is needed to ensure policy changes are having the intended effects, and to allow the government to enact timely reforms if needed.
2.43
The Committee recommends that the Australian Taxation Office obtains and publishes up-to-date data on Employee Share Scheme use.
2.44
Discussions during the public hearings indicated that the use of ESS in Australia is being hampered by a lack of awareness within the business community of the existence and benefits of ESS.
2.45
The Committee recommends that the Australian Taxation Office establish a public awareness program to inform current and potential business owners of the existence and benefits of Employee Share Schemes, and where and how to access the available resources.
2.46
Although the 2015 reforms to the taxation of ESS have been reviewed, it remains unclear whether these changes have increased ESS usage due to a lack of relevant and up-to-date data.
2.47
The Committee considers any changes to legislation resulting from this inquiry and the 2019 Treasury consultation referred to in Chapter 4 of this report should be reviewed by the Productivity Commission five years after the date of commencement of the changes.
2.48
When considering measures to improve the use of ESS in Australia, it is helpful to consider what arrangements are in place in the US and the UK, where ESS use is readily accepted and part of the early start-up architecture of the top companies.
2.49
The evidence received by the Committee indicates that every regime has its own complexities and issues, but there are beneficial practices in other jurisdictions that Australia should consider adopting to improve the take-up of ESS and remain internationally competitive.
2.50
The Committee recommends that the Productivity Commission investigate how the use of employee ownership trusts can be facilitated and encouraged.
2.51
The Committee recommends that the Productivity Commission explore the structure of Employee Share Schemes and their related taxation treatment in other countries, and how this could be adapted to the Australian taxation system to support productivity and innovation.