Simplify, simplify, simplify
How do we make the system as simple as possible to administer both for the government, employers & employees alike, while at the same time preventing people gaming the system and abusing it in ways not intended.
I’ve written about this before here, but after reading Chris Joye's suggestions here i have a few new thoughts for improvements and further simplification.
Joy’s suggestion was brilliantly simple: to exempt the first $20M of gains for a founder or early stage employee from being taxed. But there are a few details that would need to be ironed out to be able to turn it into an actual policy
This also got me thinking, all the current criteria and hoop jumping requirements within the current Employee Share Scheme (ESS) Startup Concessions & Small Business CGT Concession systems are to determine “which businesses” should be eligible and which ones should not. And to be fair, all these rules and complexity are to prevent somebody taking advantage of the system, over and above its intended purpose, and to prevent the system being abused.
But when you really think about it, who should get this tax concession should have nothing to do with the company issuing the equity, it is all about the “individual” getting the benefit.
A teller working for CBA on $60,000 per year paying no tax on selling $20,000 of CBA shares granted to them as part of their employment remuneration should not be viewed as someone abusing the system, just because the company issuing the shares happens to be CBA and is not a small business or an innovative startup company. This should be viewed as the system working as intended.
What should we do then?
If we work from this premise and using the cap suggested by Chris Joye of $20M (which could just as easily be set at $10M or $2M) our policy could be as follows:
- Every individual gets a lifetime limit of $20M (or $10M or $2M) of exempt capital gains from the sale of equity in a business.
- Every individual also gets a lifetime limit of 25% of the above amount, in this example $5M (or $2.5M or $500K) of exempt Employee Share grants
- You are a founder
- Determined as any equity owner who acquired their ownership within the first 12 months of the company being registered with ASIC or the ABN being registered with the ATO (in the case of sole traders, partnerships, trusts, etc)
- When you sell your ownership in this business the first $20M (or $10M or $2M) of capital gains is 100% tax free, with everything above this taxed at normal rates.
- You are a qualifying employee
- Determined as person who has been paid a consistent, at minimum monthly, salary for at least 12 months before, during or after the time they were granted an ownership in the business
- When you are granted equity in a business as a qualifying employee this is exempt from tax up to the lifetime limit $5M (or $2.5M or $500K), and any further grants are taxed as ordinary income, like they are currently
- When you sell your equity in a business (it can be one you received as employee share grants, or could be another business you founded) the first $20M (or $10M or $2M) of capital gains is 100% tax free, with everything above this taxed at normal rates.
Why this is better
Changing to an individual assessment method instead of a both business and individual assessment will enable us to remove 1000s of pages out of the tax legislation and massively simplify the system.
It will significantly reduce the costs to businesses for offering this to their employees and create a massive benefit to every worker in the country currently locked out of owning equity in the business they work for because of who they work for, not the financial position they are currently in
It prevents mega wealthy individuals from abusing the system, with its clear life time caps and limits, and opens up the system to all workers to participate
