On the eve of the government announcing a reversal of the current employee share scheme system, leading technology entrepreneur and Atlassian co-founder has warned the current taxing of employee equity is forcing workers overseas.
Speaking at the Bradfield Lecture in Sydney on Monday night, Scott Farquhar praised the government for some tax incentives, but slammed the current share scheme and several other ailments keeping Australia from moving ahead in the technology space.
"There are some brain-dead things we do that send young companies overseas before they have begun," said Mr Farquhar.
As the system stands, equity issued to employees is taxed at the point of issue, rather than when the options are exercised, making it expensive for start up companies looking to attract talent.
"The employee is effectively required to pay tax on options that are illiquid," Mr Farquhar said. "Given the high risk nature of start-ups, those options may never have any realisable value."
As reported in Fairfax Media, the government's National Industry Investment and Competitiveness Agenda will re-introduce tax breaks for employee share schemes, and options will be taxed when they are converted to shares.
Atlassian issued shares to its employees when it began, but it has cost the company $5.4 million in tax.
"We made it a priority and were lucky that we could afford it, but many other companies are not in the same fortunate situation we were in," said Mr Farquhar. "It is another disincentive to stay in Australia if you have a tech sector start-up."
Mr Farquhar argued securing talent was only one of the difficult parts of doing business in Australia, access to capital was another. Praising Sydney's start-up scene ("We can also build a tech centre in Australia - and I'd argue Sydney") Mr Farquhar urged superannuation funds to look to local venture capital for opportunities.
Comparing Australia to the US, which commits around 2 per cent of pension funds to venture capital, Mr Farquhar pointed out current superannuation disclosure laws require billion dollar funds to disclose exact funding details for minute portions of their investments. This dissuades them from looking at venture capital funds who support small start-ups.
"I'm hugely in favour of better disclosure, but this is madness." said Mr Farquhar. "It turns every venture capital backed start-up into a quasi-public company."
Offering a materiality clause as a possible solution, Mr Farquhar said "any investment made by a VC is likely to be so immaterial to an overall superannuation fund, as to be a non-issue."
While a change in the employee share scheme legislation would attract more prestigious talent to start-ups, Mr Farquhar said sourcing employees from overseas is too bureaucratic for start-ups who don't have the funds to utilise 457 visas.
"The process is so byzantine that almost everyone needs to hire employment lawyers to handle it," he said.
"There should be a special class of 457 visas for software start-ups that are fast-tracked, and have a simple online form to apply."
Mr Farquhar lastly spoke about the lack of computing skills taught in the Australian education system. He pointed out enrolments in tertiary computer science were falling, despite demand for technologically literate workers skyrocketing.
This lack of university interest probably starts at the school level, where there no uniform national requirement to teach computer and software skills," said Mr Farquhar, although he praised the new national Digital Technologies Curriculum currently under review as part of the national curriculum review.
