Labor's draconian ESOP legislation forcing local talent offshore: Scott Frew

Labor's draconian ESOP legislation forcing local talent offshore: Scott Frew

ESOP changes should apply to all privately-held companies

Distribution Central CEO, Scott Frew.

Distribution Central CEO, Scott Frew.

As the Coalition Government proceeds with its consultations regarding existing Employee Share Option Plans (ESOPs) legislation, Deloitte has made a submission addressed to Treasurer Joe Hockey and Minister Ian McFarlane which emphasizes the need of a more comprehensive review.

The professional services firm proposes a four-point solution which entails: a clear definition of ‘startup’; more contextual tax rules; a simplified valuation methodology for ESOP tax purposes; and standardised documentation accessible on the Australian Tax Office (ATO) web site.

In its submission, Deloitte advocates the definition of startups as “an Australian-based business with consolidated revenue of $15 million per annum or less, and providing (new) products or services for no more than ten years in Australia.”

Distribution Central CEO, Scott Frew, on the other hand said that it should not be a matter of defining companies on financial grounds.

He told ARN that “the changes shouldn’t just apply to micro-startups, it should be all privately-held companies, as they can’t trade the shares like a public company.”

This is because options offered to employees by private companies are intangible and can disappear.

Using the distribution company as an example, Frew said, “When I started Distribution Central, it was a $1.7m business. We are now approaching $300m, but I still consider myself a startup.”

“It’s a philosophy in our heads, not the fact that we are small. We are still issuing options to new staff that we want to keep motivated, so it’s still a problem for me.”

Frew said that the failure to undo the umbrella decisions made by the former Labor Government will force talent in the local IT industry to move offshore as the tax regime is draconian.

“If you’re a software developer and you want to go for a new startup, it’s better to do that in the US because you won’t get taxed on the options they’ll issue you.”

“It should be a case of ‘great employee, here’s some options – if we’re lucky enough to sell, you’ll make your bonus at that point, and pay your tax as normal at that point’. That way the employee doesn't have to pay money on something he or she doesn't necessarily have.”

The existing ESOP legislation was implemented to prevent public companies offering employees options rather than incomes to mitigate taxes.

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Tags employmentDeloittedistribution centralESOPoptions


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