Progress but not world-class: The Encompass view of the Australian 2021 Budget

As a company founded in Sydney and now growing rapidly overseas, both attracting and retaining talented people and allowing such individuals to develop their careers through experience gained internationally are important to our success.

In the 2021-22 Budget, Federal Treasurer Josh Frydenberg introduced a new Global Talent visa and Temporary Activity visa, as well as announcing plans to modernize the framework for individual tax residency, to encourage highly skilled individuals to relocate to Australia.

These changes are welcome. The existing rules for determining the tax residency of an individual were complex, which may have discouraged people from seeking opportunities. Frydenberg’s plans are based on a Reforming Individual Tax Residency Rules – A Model for Modernisation, a report prepared for the Treasurer by the Australian Government’s Board of Taxation. Following extensive consultation and research, the Board concluded that the current individual tax residency rules are no longer appropriate and require modernisation. They must be simpler.

In particular, the current rules do not reflect global work practices, and impose an inappropriate compliance burden on many taxpayers in all but the simplest of cases – this has led to increased uncertainty and disputes.

In addition, the Board identified a number of integrity concerns that arise due to the way in which the current rules operate. The need to modernize was brought into sharp focus by the COVID-19 pandemic, as individuals being unable to travel because of restrictions placed at national borders created complications for employers negotiating their obligations under Superannuation Guarantee and Pay-As-You-Go (PAYG) withholding rules.

Mr Frydenberg also announced that the Government will make it easier for businesses to offer employee share schemes (ESS), to provide more Australians with a share in the economic value they create through their hard work. Specifically, the Government will modernize the tax treatment of ESS by removing the cessation of employment taxing point for tax-deferred ESS.

We know how important this is to employees, and to businesses as they work to attract the skilled people they need to grow. However, Australia competes in a global economy, and its tax treatment of ESSs must be competitive. In the UK, one country where we operate, share schemes are vetted by HM Revenue and Customs (HMRC), which then offers lower rates of Capital Gains Tax (CGT) for employees able to realise gains on their options.

While recent developments are a step forward, this still leaves Australian companies and their employees at a disadvantage, when compared to global counterparts.

Mr Frydenberg’s assessment that Australia is an attractive place to do business because of factors including our way of life, our safe, clean cities and our proximity to Asia rings true, but these things alone are unlikely to sway talented and smart individuals who understand they will be perhaps more fairly treated for taking the risk of working at small, privately-held companies in jurisdictions offering more generous tax treatment of share schemes.

Now is the time for Mr Frydenberg to commission a new report by the Australian Government’s Board of Taxation.