Michael I like your hypothesis and your suggested amendments to the schedule. Please let us know what your advisors come back with. Personally, I think the company buying back the shares/cancelling them, is preferable, but that's just me.
But I also just wanted to add, if I may, that there are provisions in the Act which exempt the type of capital gain (value shifting) that your accountant has identified, provided that the gain is below certain thresholds. So if your company is still worth sweet FA (ie nothing) when your shares 'vest' then the capital gain is exempt. I think that on the whole, people should spend more time testing the assumptions they have about their product and their customers than worrying about this tax sh*t. What we want is to get to the point where our company actually gets caught by provisions such as these. If we rigorously test our assumptions, develop our business model and end up getting traction, then that's the best time to start speaking to genius tax lawyers/accountants who can advise on how to minimise potential tax liabilities. Keeping it simple is the perfect place to start. Having said all that, if you can clarify the Startmate docs, then that would be a win for the Australian start-up community. All the best Silicon Beachers! Cheers Michael PS - The ATO NEVER gives straight advice on the phone. They are a bunch of pussies. The guys manning the phones are not lawyers, they are phone-monkeys. They read prepared scripts. If you're really desperate for a solid opinion from the ATO, one that will stand up on appeal, you have to apply for a private ruling. If your accountant is wasting your time ringing them up.... well it just makes me wonder. The whole point of being a professional is to give a professional opinion. On Feb 23, 10:39 pm, Andrew Dowling <andrew.dowl...@tapestry.net> wrote: > Adrian, > > Just on the topic of whether it's the company lending to employees > directly vs. a trust, I believe the original motivation for using the > trust was to take advantage of an FBT exemption on trusts set up to > acquire shares for employees. However the ATO has signalled that the > use of this loophole for employee share schemes by loaning funds to > the employee to purchase the shares (which the company can claim as a > deduction even though it gets the money back anyway) is somewhat > questionable and is going to be targeted by them. Check out: > > http://www.afrsmartinvestor.com/p/howto/taxation/how_not_to_fall_foul... > > Not my area of expertise but it's something quite relevant to us as we > start looking to set up our own employee share scheme. If we get any > formal advice on this issue we'll share with the forum. > > Andrew. > > On Feb 23, 9:20 am, Adrian Bunter <adrian.bun...@gmail.com> wrote: > > > > > > > > > The other thing I forgot to add (which could actually be quite > > important...) is one of the issues is the shareholiding % and voting > > power %. > > > As I understand it if you have more than 5% of shares or 5% of votes, > > the ability to defer doesn't apply and you have to tax upfront, > > irrespective of the vesting date (or deferral date) of the shares. > > > Therefore, so long as you hold 5% (I would say fully vested to be > > safe) then future vesting shouldn't be a problem as you will already > > have paid tax on these (if any). > > > This "exemption" from deferral could work for founders, but probably > > not general employee incentives. > > > For general employee incentives I would use a standard loan scheme > > with buyback rights with "good leaver" and "bad leaver" provisions. > > > Regards > > Adrian > > > On Feb 22, 11:48 pm, Michael Overell <michael.over...@gmail.com> > > wrote: > > > > Thanks all for the input so far. Added to many other discussions I've > > > had this week, it's clearly a complicated question. > > > > We're seeking further advice, but the consensus so far aligns with > > > Adrian's point: Shares vested or issued at a later date, if at a > > > discount to 'market value', will cause a tax problem for founders. The > > > discount is taxable as ordinary income in that year, unless certain > > > conditions are met to defer the taxing point. As a company, you may > > > also have the ATO sniffing about your 'fair market value' every time > > > you issue new shares. > > > > Implication (imho): > > > US-style founder vesting schemes (with vested shares issued over time) > > > are not practical in Australia. Or at least, are not founder > > > friendly. I plan to follow up with Niki and the Startmate crew, > > > because their open-sourced docs (which are clearly awesome), do seem > > > to follow a US approach. > > > > When it comes to tax and structuring, I prefer simplicity. Geoff's > > > loan / unit trust scheme makes me a little nervous on that basis, > > > although it does appear to solve the biggest issues. > > > > We're currently testing this as a working hypothesis, which might be a > > > simple way to get the same effect as vesting, without the obvious tax > > > issues: > > > > 1. All shares are issued to founders upfront. > > > > 2. If a founder stops meeting their vesting criteria, the Company has > > > the option to buy back a proportion of their shares at the issue > > > price. > > > > 3. If the company elects not to buy back that proportion of shares, > > > the shares will be transferred to the remaining shareholders in > > > proportion to their ownership, at the issue price. > > > > 4. The founder can continue holding the proportion of shares that were > > > not subject to buy back or transfer. > > > > 5. Schedule: The proportion of founder shares that are subject to the > > > buy back or transfer condition will reduce over a period of X years > > > from the effective date. > > > > We are seeking proper advice on this approach, but I wanted to throw > > > it out to the forum. > > > > Could it be a tax effective way to achieve the same outcome as founder > > > shares 'vesting' over time? > > > > Cheers! > > > > Michael Overell > > > mich...@recruitloop.com+61 408 791 > > > 984begin_of_the_skype_highlighting +61 408 791 984 > > > > On Feb 22, 10:28 pm, Adrian Bunter <adrian.bun...@gmail.com> wrote: > > > > > This is a very complex area, and one that actually a lot of tax > > > > accountants don't know and therefore just get it wrong. There were > > > > also rule changes that took effect from 1 July 2009. Some people still > > > > think under the old rules. > > > > > Don't consider this as tax advice and get some for your situation from > > > > an accountant who actually knows the rules. > > > > > Some general comments: > > > > > Vesting or Issue at some later date, if it is at a discount to the > > > > then value, is likely to cause a tax problem (ie the "discount" > > > > received being taxable as ordinary income to the employee). > > > > > Re the suggestion re setting up a unit trust and lending it the funds, > > > > you don't actually need a unit trust, you can just issue the shares > > > > and have the company lend the employee the funds via an employee loan > > > > plan scheme. Because the employee "pays" for the shares by taking out > > > > the loan, there is no discount. The company often gets buyback rights > > > > to buy these back at some pre-determined price. Downside is that there > > > > are an increased number of shareholders which may make things a little > > > > more complicated, but take it into account in the shareholders > > > > agreement and think about voting rights and possibly other power of > > > > attorney rights to "control" the shares. > > > > > The loan scheme works well for employees, but possibly not founders. > > > > If the founders have really issued themselves shares right upfront, > > > > then the value of these shares should be nominal as there is nothing > > > > in the entity at that time and they should have actually already > > > > vested. > > > > > If you get granted shares with deferred vesting you must defer the > > > > taxing point under a range of circumstances. One of the requirements > > > > it that the shares are ordinary shares. So if you feel like some "fun" > > > > you can actually read the tax legislation on this, as this is one part > > > > that does actually make sense and you can follow it. Also read the ATO > > > > guides on this as they are pretty good. By doing this you can > > > > understand the exact rules and you can work out some of the "work > > > > arounds" to appear to ensure up-front taxing, even if there are > > > > deferred vesting dates (that is, if you don't want to use a loan plan, > > > > which is probably the easiest way). > > > > > Good luck. > > > > > Regards > > > > Adrian > > > > > On Feb 21, 8:10 am, Graham Lea <graham....@belmonttechnology.com.au> > > > > wrote: > > > > > > I'm not a tax professional, but I've had a number of experiences > > > > > preparing or reviewing tax returns that included ESOP options. > > > > > > What your accountant has said sounds pretty much like what the tax > > > > > pack says: if you receive options (or shares) at a discount, the > > > > > discount is considered income in the year of allocation and so > > > > > becomes taxable. However, it always talks about "the year in which > > > > > the shares were allocated". In the case of my options, they vest > > > > > gradually over a number of years, but they were all "allocated" the > > > > > year I received them. I saw no mention of the term "vesting" in the > > > > > tax docs. So if all of your shares have been allocated, but just > > > > > haven't vested yet, you may be able to tax them all in the first year > > > > > when they were worthless. Talk to a pro, though, and consider calling > > > > > the ATO to get a definition of "allocated". I know a lot of agents > > > > > with a query will call the ATO repeatedly until they get someone who > > > > > gives them the answer they want. > > > > > > Cheers, > > > > > > Graham. > > > > > > -- > > > > > Graham Lea > > > > > gra...@grahamlea.com > > > > > > On 19/02/2012, at 11:21 PM, Michael Overell > > > > > <michael.over...@gmail.com> wrote: > > > > > > > Do delayed vesting shares leave founders with personal tax > > > > > > liabilities? > > > > > > > I've struggled to get a clear / detailed answer on this question, > > > > > > despite talking to a bunch of people and searching the SB archives. > > > > > > Here's hoping a few people in the community can help solve it... > > > > > > > Situation: > > > > > > - The founders in a company agree to vest their shares over several > > > > > > years (eg, as outlined in the Startmate docs > > > > > > -http://www.startmate.com.au/financing-docs). > > > > > > - The value of these delayed vesting shares is determined upfront > > > > > > (effectively zero). > > > > > > - At each vesting milestone, the appropriate number of new ordinary > > > > > > shares are issued to each founder. > > > > > > > Complication: > > > > > > - Over time, the value of the company increases. Additional > > > > > > preference > > > > > > shares may be issued at a significantly higher price. > > > > > > - At each milestone, the delayed vesting shares are now issued at a > > > > > > price that represents a steep discount to the 'market value'. > > > > > > > An accountant has raised a concern with this situation. He suggests > > > > > > that if shares are issued to founders/employees at a discount to > > > > > > 'market value', there will be a personal tax liability for those > > > > > > people in the year of issue. That is, the difference between issue > > > > > > price and market value could be recognised by the ATO as a 'gain', > > > > > > and > > > > > > taxed as such. > > > > > > > Question: > > > > > > Do the founders have a problem here, or is there a way around it? > > > > > > Does anyone have actual experience or (informal) advice in this > > > > > > situation? > > > > > > Note, only interested in Australian tax law (not US). > > > > > > > Thanks in advance! > > > > > > > Michael Overell > > > > > > RecruitLoop > > ... > > read more » -- You received this message because you are subscribed to the Silicon Beach Australia mailing list. Vist http://siliconbeachaustralia.org for more Forum rules 1) No lurkers! It is expected that you introduce yourself. 2) No jobs postings. 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