AusBiotech responds to the review of employee share schemes

AusBiotech has responded on behalf of its members to the federal government’s review of employee share schemes (ESS) for start-ups, making both direct and written submissions to the review last week.

AusBiotech said in its submissions that most start-up companies are funded by means other than sales revenue and require those funds to conduct research and development and prepare a product to earn revenue. In this cash-pressed state they often rely on the support of ESSs to attract quality employees and they are an important support in enabling innovative start-up companies to establish. ESSs complement cash remuneration, making a salary package appear more substantive and attractive, in addition to the mutual benefit of giving employees a vested interest in the success of the company.

The importance of ESSs is especially poignant and amplified in the biotechnology sector, where the pre-revenue phase is typically extended by the need to clear regulatory hurdles before revenue can be earned - sometimes by more than a decade - and the cash required to reach regulatory approval.

When the changes to ESSs were announced in 2009, the measures were predicted by industry to result in less incentive for employees, greater administrative costs for companies and subsequently result in companies turning away from the use of such schemes. It was feared that the changes would therefore undermine innovation in start-up biotechnology companies and there was a significant groundswell of opposition.

Anecdotally, many start-up companies in the biotechnology sector reported grudgingly turning to alternative, less-satisfactory, methods to retain, incentivise and reward employees in the intervening years.

The burden placed on companies in 2009 seemed to be aimed at the top end of town and had wrongly captured small, rapidly growing companies that often do not have the ability to reward employees with cash and so use shares and options as incentives and future rewards.

AusBiotech supports a more sympathetic treatment of start-up companies, to support the growth of the innovative sector in Australia, and made the following points in its submissions.

AusBiotech noted that, although the defining of a ‘start-up’ is fraught with issues, those companies eligible for the 45% refundable tax credit under the Research and Development (R&D) Tax Incentive - that is, those with turnover under $20 million - ought to be exempt from paying tax on employee share packages. The exemption recognises the difficulty innovative start-up companies face in developing their technologies while retaining highly skilled workers.

AusBiotech recommended that the problem of how best to determine the market value of ESS benefits be solved by taxing shares at the time of liquidation/realisation, when market valuation is known, rather than at the time of issue, when value is uncertain.

Taxing at the time of liquidation - or realisation of a gain - is the only way forward for small innovation companies. It provides an important incentive for companies and employees and solves the issue of valuation. It also simplifies the administration from both the perspective of the ATO and from the issuing company.

Employee share incentive schemes are an excellent way to attract high-calibre, experienced staff to a start-up company, providing an important support for start-up companies. However, they only work when tax is charged on success. If tax is charged pre-success the shares are a cost to the employee with an unknown outcome. This risk is intolerable for many staff and provides a disincentive. The Australian start-up biotechnology community needs an encouraging tax system, which enables success sharing at the time it happens.

Australia needs innovation to continue productivity growth and new industries to supplement declining industries. If Australia’s tax system does not provide a conducive environment with globally competitive (comparable) incentives, these new ventures are undermined and Australia’s best ideas and the resulting economic benefits are then transferred to other countries.