Norah Seddon, partner, People Business, said the legislation severely limits offerings to employees and should be broadly reformed.
"Employee share schemes incentivise employees to increase productivity and encourage innovation to further grow the Australian economy," she said.
Changes to the share scheme rules in relation to start-up businesses are urgently needed, said Ms Seddon, however, as importantly, reforms should also be made to share schemes outside the start-up sector including those provided by privately owned companies.
Ms Seddon outlined a number of reforms she says the federal government should consider.
• Options should be taxable at exercise not vesting
"Taxing options at vesting rather than exercise – when the shares are allocated – puts employees at a tax disadvantage," she said.
"Especially when compared to countries where options are taxed at exercise, such as in the United Kingdom and the United States, which compete with Australia for talent."
• Cessation of employment should not be a taxing point
"When employees leave their job, they should not have to pay tax on the current market value of their unvested shares as they cannot sell their shares to pay their tax," Ms Seddon said.
• Introduce a targeted regime for start-ups
"Limiting the definition of a start-up by reference to employee numbers, revenue and how long the business has been in existence is too narrow," she said.
"The definition should be based on its activities and the stage of the life cycle of the business."
• Introduce new rules for companies with illiquid shares
"The current taxation rules give rise to issues for employees with shares that lack marketability, such as shares in private companies and small cap listed companies," Ms Seddon said.
"The current rules mean that the employee could pay tax on the value of the shares at a time when they cannot dispose of the shares because of this lack of marketability."
Ms Seddon said share schemes are a very important incentive for employers to offer employees and a valuable tool in increasing employee productivity.
"If the federal government adopts the reforms we recommend they will grow employee participation and productivity in business, and help make Australia more innovative and prosperous,” Ms Seddon said.