As part of the Government’s update to the National Digital Economy Strategy, on 12 June 2013 they have announced a review of the regulatory arrangements for employee share schemes which will see consultation by December 2013.
Due to concerns raised by several industry sectors about the current tax arrangements that apply to share and option schemes offered by start-up firms, the government will review the situation and address the barriers faced by start-ups including:
- developing guidance to reduce the administrative burden of establishing an ESS (meaning the cost of valuing shares and options)
- adjusting the valuation methodology of options
- examining the point at which share options are taxed for start-up companies
While the document that contains this announcement is focused on the digital industries, with a particular focus on high-tech start-ups, it is equally applicable to other industries that contain start-up ventures.
As those who have implemented employee share or option schemes would know, there is a balance that is required between providing the employee meaningful value and reward through equity incentives in the company they work for, and ensuring that the tax outcomes for the employee do not leave them worse off than if they had not received any equity incentive.
One aspect of the review that will be followed very closely will be any changes to the valuation methodology of options, particularly when it comes to the taxation outcomes.
Currently the Income Tax Assessment Act 1997 and Regulations provide the ability to value options using a Black-Scholes method that has very concessional factors, such as volatility of 10%. Should the variables in the valuation method be changed, this may result in higher taxation values than currently exist.
A government review 2 years ago raised a possible increase in the assumed volatility to 20%. An increase of this nature could result in much higher taxation values for options, depending on the ratio of share price to exercise price at the time of issue, and the length of time to expiry for the options.
Given the importance of any potential changes to the ESS rules, Value Logic will be involved in the discussion and consultation with the government.
If you have any concerns or views on the potential changes to the ESS rules, please contact Value Logic or Treasury to make your concerns known.