Pollenizer’s Mick Liubinskas is agitating for change to the way the Australian Tax Office treats ESOPs (Employee Share Option Plans). Deloitte and Norton Rose are on the case, and it’s one of the issues you’ve told us you’d like to see worked on by the next Federal Government.

Under the current laws, ESOPs can be expensive and complicated enough to make them rare amongst Australian tech startups. Meanwhile, there’s a general sense that now is the time to lobby for change, since we have a federal election campaign long enough to lobby Canberra. Even better, Labor, Liberal and Greens all seem keen to propose popular legislative changes in their policies.

Liubinskas posted his Twitter discussion with Startmate’s Niki Scevak on Pollenizer’s blog, where he neatly explains how ESOPs are meant to work, and explains the problems arising under Australian legislation. To paraphrase Scevak’s response, he says the problem is over-stated, and if you’re a small startup and you really want to motivate employees with an ESOP, it is possible.

Scevak’s right to a point. It is possible, but what’s possible for an industry veteran like Niki to grasp isn’t easy for mere mortals to grasp. Someone leaving their full-time job and joining a startup for the first time won’t have the same understanding.

Here’s the rub: motivating potential employees with equity only works if the people you want to hire understand how it works, and to my mind all the workaround ways of granting Aussie employees a stake in the company are too complicated — they come off looking risky and complex, designed to bamboozle you out of a fair salary.

Sure you can still do a simple ESOP by setting up your company structure in the US. But setting up a Delaware C Corp is not the answer on its own — if you’re an Australian taxpayer you’ll still be subject to ATO treatment of your US stock options unless you also move to the US, get paid in the US, and pay tax in the US (US/AU tax treaty will mean you only have to pay tax in one country). Moving to the US is non-trivial for the startup and for the employee-to-be, and probably makes your ESOP even less desirable an offer in comparison to salary.

Liubinskas’ proposal is typically simple for the man I like to call “Mr Focus”: a $2M revenue threshold. Until your new business is earning less than $2M revenue a year, you can grant share options to employees and no tax is payable until the employee exercises the option to buy their shares.

Great idea. I can’t see a reason why it shouldn’t be extended to all small ventures in Australia, not just tech startups. If sharing the risks and rewards of equity with tech startup employees is a good idea, it could make sense for other industries where recruiting and retaining good staff is a problem (restauranteurs and retailers, I’m looking at you).

Thanks to the privatisation of Telstra, Australia has one of the highest per capita rates of share ownership in the world, suggesting Australians are more likely to understand how sharemarkets work, what a share option is, and what it isn’t.

But we still need an ESOP framework that is easy for potential employees to understand, that doesn’t tax them until their options are exercised, and a framework that is cheap and attractive for entrepreneurs to setup.

(You know what else would be great? If the ATO could extend its Business Benchmark reporting to include a report for tech startups, so we could compare our financial performance to our peers. Or if that’s too much of a stretch, even Information Technology as a whole. They’re tracking hairdressing salons, hot bread shops, carpet layers and air conditioning installers, but not information technology. Awesome.)