Is Australia open for start-up business?

Reforming share option tax rules that are stunting Australia’s tech start-ups would be a clear message that we are really open for business.

In 1999, Bonnie Brown took a job as the in-house masseuse at a small Silicon Valley start-up. Five years later she retired a multi-millionaire after the shares she received in her employee option scheme soared following the company’s stock market float.

Bonnie Brown’s story of being the 41st employee of Google – and possibly the world’s richest masseuse – is both the stuff of Silicon Valley legend and the reality of the tech industry where staff option schemes are seen as a basic part of a worker’s salary.

It’s unlikely Bonnie Brown’s story will be repeated in Australia today as a 2009 change to the tax rules discouraged employee share options and created a major barrier to the local tech industry’s development.

“We are the only country I’ve come across that taxes options before they’ve been exercised,” Deloitte tax partner Rob Basker told a media briefing in Sydney this week.

Basker was launching Deloitte’s Retaining Talent initiative to lobby the Federal Government on changing the tax rules governing employee share options.

The initiative is based upon Deloitte’s submission to Treasury’s recent review of employee share schemes. The paper included a survey of 130 Australian tech start-ups and showed Australia was at a disadvantage to the rest of the developed world.

The importance of options

Sydney business intelligence and data visualisation company Encompass is one Australian start-up that does offer employee stock options, seeing them as critical for giving staff a stake in the three-year-old company.

“We want everyone to be a part of the company and have their focus on growing longer-term value of the company,” Encompass co-founder Wayne Johnson told Business Spectator.

“The best way to do this is to ensure that the shareholder goals are aligned to staff goals by focusing on company value. This is one way for us to reward talented staff beyond their normal remuneration for the creativity they bring to the company.”

Unfortunately for Johnson and Encompass’ employees, the current rules mean that as the company grows it will likely be forced to move out of Australia. “Once professional investors and venture capital firms take investment in the company, then we will have no choice,” says Johnson.

Encompass’ dilemma is what worries the Australian Information Industry Association. “Australia will lose both smart people and smart ideas if we continue to penalise talent and hamper the success of our start-ups and entrepreneurs”, the association says.

The international experience

Australia’s current problem is one that has already been recognised and dealt with in other countries.

In the United Kingdom, the Cameron government’s changes to the treatment of share options has been credited as one of the driving forces behind London’s booming ‘Silicon Roundabout’ start-up district.

In San Francisco, reform of municipal income tax rules on options has also stimulated the shift of start-up tech companies from Silicon Valley back into the downturn districts, as well as encouraging iconic local companies like Twitter and Salesforce to remain in the city.

“It was bought to our attention that we were the only city in California that taxed stock options,” Laura Barsotti, the city’s Director of Business Development, told Business Spectator in November.

“Companies that wanted to go public were having to leave San Francisco to afford it," Barsotti says.

"We did an entire revision to our tax code which showed to investors they could count on San Francisco to be business-friendly.”

Is Australia really open for business?

Like San Francisco, the challenge for Australia is to show the start-up sector and its employees that it’s ‘open for business’.

In the opinion of Deloitte’s Baskerand Damien Tampling – the firm’s partner for technology, media and telecommunications – the best approach to reform is to start small. Deloitte’s proposal offers concessional treatment only to staff earning less than $180,000 per year, in companies less than 10 years old and with less than $15 million a year in turnover. 

The proposal acknowledges neither the government nor Treasury has an appetite for larger-scale tax reform.

“Our submission will not please all stakeholders in that it only looks initially to improve this situation for start-up companies, but we believe it is vital that some change is achieved rather than no change at all,” Tampling said.

The AIIA, Deloitte and many in the tech industry hope that a small change would at least be the start of stimulating more investment and employment in the sectors which promise to become the employers of the next 50 years.

With the shutting down of Australia’s car manufacturing industry, the challenge is to find where Australia’s Bonnie – or Bill – Browns are going to find work in Broadmeadows, Geelong or Altona.

It may be that, like in London and San Francisco, reforming how Australia treats new businesses is the first step towards filling the gap left by Toyota’s closure, and to continue our run of economic success. 

Paul Wallbank is the publisher of Networked Globe. You cam read more of his thoughts in his personal blog Decoding The New Economy.