Andrew Leigh (Fraser, Australian Labor Party, Shadow Assistant Treasurer) Share this | Hansard source

I rise to speak on the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, and I move:

That all the words after "That" be omitted with a view to substituting the following words:

"while not declining to give the bill a second reading, the House condemns the government's cuts to Australia's innovation and science capacity."

In 2009 this parliament passed a set of laws relating to employee share schemes. As the then minister, Robert McClelland, noted:

This measure will better target the employee share scheme tax concessions to low- and middle-income earners and decrease taxpayers' ability to evade or avoid tax. The new measures will also protect Commonwealth revenues needed to support jobs and invest in nation building.

The measure was related to a Productivity Commission inquiry then on foot, recommendation 17 of which suggested:

There should be a review of the corporate governance arrangements that emanate from the Australian Government's response to this report.

It said in particular that the review should consider:

… the effectiveness and efficiency of the reforms in meeting their objectives both individually and as a package, including recent legislative reforms to termination payments and employee share schemes

The decision that the government made in the 2009 measure was described in that year's budget as follows:

Removing the tax deferral option will ensure that remuneration in the form of share discounts is taxed at an appropriate time and rate, and reduces avoidance opportunities.

We do know that there are benefits of employee share schemes to firms. Some evidence, such as that put together by my former professor, Richard Freeman, suggests that firms with employee share schemes are more productive. But it is important, too, that we ensure the employee share schemes are not used for avoidance at the higher end. Warren Buffett has raised the issue in the United States of high-income earners being taxed at the capital gains tax rate while low-income earners are taxed at their marginal labour income tax rate. He told an event in 2007:

The 400 of us—

Meaning the Forbes Magazine list of the richest 400 people in the United States—

pay a lower part of their income in taxes than our receptionists do, or our cleaning-ladies for that matter.

That has evolved into what the Americans call 'the Buffet Rule'—the principle that marginal tax rates ought not drop at the very top. That context is important in understanding where we are today.

This is a bill which does not repeal the 2009 changes but, as the explanatory memorandum notes, it makes modest adjustments to employee share ownership schemes. The explanatory memorandum goes into some detail as to how the new law differs from the current law. In the case of ESS deferred schemes, where income tax is deferred, the current law provides that the taxing point is the earliest of the following: when there is no real risk of forfeiture of the benefits and any restrictions on the sale or exercise are lifted; when the employee ceases employment; or seven years after the shares or rights were acquired.

The new law sets two separate tests: one for shares and one for rights. In the case of shares, the test is extended from seven years to 15 years and in the case of rights there is, in addition to the extension from seven to 15 years, an additional principle: when the employee exercises the right, and after exercising the right there is no real risk of forfeiture of the underlying share and the restrictions on sale of the share are lifted.

The current law provides that all employee share ownership scheme rules and concessions apply equally to all corporate tax entities and their employees. The new law provides that employees of certain small start-up companies receive further concessions when acquiring certain shares or rights in their employer or the holding company of their employer. These further concessions are an income tax exemption for the discount received on certain shares and the deferral of the income tax on the discount received on certain rights, which are instead taxed under the capital gains tax rules.

The principles underlying this measure are to ensure that employee share ownership schemes are available to start-up firms. Boosting the number of start-ups in Australia is a national priority. We need, as the investment phase of the mining boom tapers off, to have industries which are continuing to create new jobs. Places without new firms are places whose growth prospects in the future will be placed at risk. It is said that you could tell as early as 1960 that Detroit was going to be in trouble for the lack of new firms in that city at that time. A few old, large firms are not enough to continue the sustainability of employment and economic growth in a nation or a city.

That is why Labor is committed to boosting the number of start-ups. It has been my pleasure recently to visit a range of accelerators and innovation hubs around my electorate and across Australia. I pay tribute to the team at Entry 29 here in Canberra, where entrepreneurs are working cheek by jowl and learning from one another about how to break into new markets and how to crack new technologies.

I was greatly impressed when Sebastien Eckersley-Maslin took me around BlueChilli in Sydney and, indeed, had me participate in a stand-up pitch meeting which takes place on Monday mornings. The principle of holding the meeting standing up is to ensure that no-one waffles on too long. It is, indeed, a principle which could perhaps be usefully employed in this place from time to time! The way in which BlueChilli operates is to allow firms to share the facilities of coders and effectively be able to draw on in-house engineering expertise in the early stage of their start-up.

With the member for Throsby and the member for Cunningham, last week I visited the iAccelerate facility at the University of Wollongong. There it was a pleasure to meet with a range of different entrepreneurs, one of whom is currently in involved in the production of 3D printers that are cheap and ideal for use in schools. They have to be robust for use in schools, but they are also designed in such a way that the kids can see exactly what is going on in the 3D printer. The work being done at iAccelerate is particularly impressive and important given that the unemployment rate in the Illawarra is above the national average. Yet that is a part of Australia which retains better than average manufacturing skills. So the role of start-ups in creating jobs is vital there, too. Companies such as Google are also doing their own work in order to facilitate the start-up ecosystem here in Australia.

Labor's position on changes to employee share ownership schemes was first signalled by opposition leader Bill Shorten in March of last year when he said that Labor would be willing to consider amendments to the employee share scheme rules to make sure that innovative start-up companies are not unnecessarily targeted by those integrity measures. Labor believes that if you are an Australian with a good idea it should be easy for you to attract talented employees. One way in which that is done is through access to employee share schemes. Many members of the Labor frontbench have engaged with the start-up community, including Jason Clare, Ed Husic, Terri Butler—she has engaged deeply with this sector—Chris Bowen and Bill Shorten himself. The issue of employee share ownership schemes and the structure of the government's proposal has been front of mind there.

The start-up concession is based on three rules. Companies have to be an Australian firm that is privately held, less than 10 years old and have a turnover that does not exceed $50 million a year. It is also a requirement of this bill that the employee share or option must not be provided at a discount greater than 15 per cent and, in the case of an option, have an exercise price greater than an ordinary share. Naturally, one could quibble over each of these particular thresholds, but it is important to recognise that each of them is a compromise. There will be some start-up firms which are not able to satisfy all three of those criteria but, in the circumstances, I believe they are reasonable.

The importance of start-ups too, though, turns on having appropriate skills in place. That is why the Leader of the Opposition's budget reply focused so strongly on the jobs of the future. He spoke about the value of introducing coding in schools, a discipline which has moved greatly since the days when I sat down at an Apple II computer to write BASIC programs with my friends. But the rudiments of coding remain the same. The principles are that you need to understand logical thinking, the way in which loops can work and if-then statements. All of those are useful even for those who will not end up working directly in coding jobs.

The Leader of the Opposition also spoke about Labor's plan to ensure that we have more science, technology, engineering and maths graduates. We know that one of the secrets to Israel's success as a start-up nation was the influx of Russian Jewish migrants who came in after the collapse of the Soviet Union. The boost in the number of engineers that that created for the country is a part of Israel's success, although of course not the only part. Australia needs to look to examples such as Israel and the United States in thinking about how to boost the start-up ecosystem. This is an important step, but it is just one of many things that this nation needs to do in order to create a better culture of innovation and entrepreneurship.

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