The Victorian government will introduce a new standardised method of valuing start-up shares and options, with the goal of creating transparency and reducing payroll tax.
The State Revenue Office will adopt a so-called “safe harbour” method of valuation, whereby companies can apply a pre-determined approach to calculating the value of their share schemes.
Under the change some start-ups will end up paying less payroll tax and won’t have to pay for a full valuation assessment by a third party, which was costly and time consuming.
The safe harbour method is being applied retrospectively, so start-ups that paid payroll tax at a higher value on their employee share scheme interests, than would have been determined using the standardised assessment, will be eligible for a refund from the State Revenue Office.
“We have a proven record of transforming start-ups into high-growth firms, and this is yet another initiative that encourages start-ups to take hold and thrive in our state,” Victorian treasurer Tim Pallas said.
“Our world-renowned start-up ecosystem is growing and has the potential to add up to $4 billion to the Victorian economy and create thousands of jobs.”
In the past few years the Victorian government has helped lure companies such as Stripe, Slack and Zendesk to set up local presences.
It also created an organisation known as LaunchVic to deploy $60 million in capital to support the local start-up ecosystem.
Under the new safe harbour method of valuing start-up employee share schemes and options, there will be two main methods of valuing unlisted shares.
Method one is for smaller start-ups that have been incorporated for less than seven years and have not raised more than $10 million in capital in 12 months. It determines that the market value of a share is equal to the sum of net tangible assets, minus the return required on preference shares, divided by the number of ordinary shares.
The second method can be used by all companies, including those that fit into the first category should they choose, and involves the valuation being determined by the chief financial officer of the company, or someone with the equivalent level of knowledge, taking into account tangible and intangible assets, market value of similar business, business risks and the current value of future cash flow.
Founder of growth consultancy Ignition Lane, Gavin Appel, said any legislative change that reduced red tape for start-ups was welcome.
“Founders are flat out trying to grow their businesses and dealing with valuation processes, plus complexity around ownership structures takes their already scarce time away from the main game.”
The introduction of the standardised approach comes after the state government has rolled out successive increases to the payroll tax-free threshold, with this year’s annual threshold $650,000.
“Changes like this make it easier for entrepreneurs, create more jobs and reinforce why we have become the startup destination of the Asia-Pacific,” Victorian Minister for Innovation and the Digital Economy, Philip Dalidakis, said.