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NEWS - PLANNING
Share options: a tax burden for young firms
12/4/2001
Tax relief remains one of the chief concerns of entrepreneurs, despite an acknowledgement that the burden has been lightened by the Federal Government.
The recently released Global Entrepreneurship Monitor, by Swinburne University of Technology academics Mr Kevin Hindle and Ms Susan Rushworth, found entrepreneurs sought tax reform on employee share options as a way to kick-start the economy and reward risk takers.
"Recent changes to personal and company tax and to capital gains had improved financial incentives for entrepreneurs," the authors said.
"[But] taxation treatment of employee share options made it hard to attract the best people to Australian entrepreneurial ventures, especially from overseas."
As an aside, the authors noted that respondents felt this change was an easy task, asking the Government to "just do it".
Tax changes of that type have been urged by the venture capital industry for years. Lobbyists say there are numerous Australians and foreigners sitting in overseas research labs or hi-tech firms who could be induced to come here for the proper remuneration.
That generally means a sizeable piece of the company. However, onerous tax treatment of current share ownership plans makes it unpalatable.
The complaint is that such people not only lose if the business amounts to nothing, but also if it beats the odds and is successful, because executives are left with a hefty tax bill.
The fear has been that a tax change would open up the floodgates. For one thing, it might have to apply to all businesses on the grounds of fairness, which would make the job of monitoring it very awkward.
There would still be problems if it was limited to "innovative" businesses. This is because there are disputes galore when it comes to strict definitions of this sector, with differing views on what is meant by terms like venture capital, innovation and entrepreneurship.
Nor is there an agreed international set of definitions. Mr Sam Armstrong from Quay Partners says this is why international comparisons of figures can be dangerous, because nations include different elements in their calculations on venture capital.
But even if the employee share option situation could be resolved, it would not be the last step in the venture capital industry's struggle for tax relief.
There are murmurings that investors in all young businesses should also get more tax incentives.
This would benefit those who were just investors, rather than the employee/investor targeted by the share option scenario. The contention is that they produce the cash to start a business when perhaps no other investor is interested; that investment often turns sour.
But if it's a winner, there are many who say that more of the rewards should stay in the pocket of the risk taker.
The GEM respondents said the Howard Government had supported young businesses with a range of programs, especially in the IT and biotech areas. But there was concern over how long the Government would stay committed.
The authors said government programs had to be long term for them to achieve the desired results.
"[The] lack of a long-term vision and ambition was a recurring theme and was felt to be a barrier to Australia achieving its potential."
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