James Riley
September 3, 2014

Taxing times: Tech needs a holiday

Taxing times: Tech needs a holiday
 

There are many pipe dreams in the Australian startup sector. Chief among these happy dreams is the notion that the Australian Government will end negative gearing in the property sector in favour of new and generous tax breaks for technology startups and their investors.

The other happy place that startups like to visit inside their heads is a magical land where a tiny slice of the nation’s huge pool of superannuation funds is mandated by government regulation for investment into high-growth tech companies.

I like to go to these happy places too, and there is nothing wrong with that. It is what I like about this industry: It dares to dream big.

In relation to very attractive tax-breaks given to property investment, like most of Australia I am left scratching my head.

However, I can recognise a political reality when I see it. The 1.3 million landlords in Australia who are currently enjoying a gigantic tax holiday also represent 1.3 million Australian voters who want to continue to enjoy that gigantic tax holiday.

The negative gearing of property investment is the third rail of Australian politics, to use West Wing parlance. (Actually, it is one of many, many, many third rails, given the hideously polarised nature of political discourse these days.)

Even talking about ending negative gearing is deadly. This is why you will not find anyone in public office saying anything about this issue other than to reassure investment property owners that the holiday will continue.

So it does come across as strange that the only people talking about this with any conviction are very big brained and successful startup luminaries. Maybe they know something that the rest of us don’t.

Or maybe they are just making a fond visit to their happy place. These generalised comments about the weirdly generous and counterproductive tax treatment of investment properties come on the back of second round submissions to the David Murray-chaired Financial Services Inquiry.

The FSI, which is looking at a whole range of different money-related machinery (of which tax is a major component) attracted more than 6,300 submissions. Enough to sink a battleship.

At first glance, it is true that some of these submissions do have suggestions about the negative gearing, its distortive effect on the property market, and its cost to taxpayers. And its inequity.

But you don’t need to be a visionary to know that this policy will not be touched. Not by this government and not by the next, or the one after that. That’s where my vision runs out.

Still, it is good for our industry to talk about tax. Australia competes in the world, and we need competitive tax arrangements. It is an incredibly important policy lever.

Of course, there are sections of the tech community that look on tax as an unnecessary evil that must be avoided at all costs. And this makes it difficult for our industry to contribute to tax discussions without coming off as entirely self-serving and ridiculous.

Google and Apple are regularly flogged as the poster children for the insidious and frankly immoral practice of transfer pricing and other related-party transactional practices that have the sole purpose of avoiding tax “leakage” into our community. But they are hardly the Lone Rangers (to mangle a metaphor).

This is incredibly frustrating for our successful Australian innovators, and to our burgeoning startup community. Because there has not been a more urgent time in the past 20 years for our industry to be represented in this debate.

The venture capital sector is broken in this country, and the government supporting mechanism – the Innovation Investment Fund – has been axed with no replacement policy even hinted at. This is a problem.

It is a time when the local tech sector – the Australian home-grown technology sector – needs a loud and clear voice in the debate about tax and about incentives and about the future of our industry.

It is unfortunate that when our successful tech entrepreneurs start talking about lowering tax-rates on startups, and zero capital gains for startups, and more generous R&D concessions – and about junking negative gearing on property investments – much of the rest of Australia just wants to chuck rocks at them.

These Australian entrepreneurs need to be heard. Tax-based incentives are notoriously difficult to implement in a targeted way. But if we are to find a way to build our funding sector and out venture capital industry, targeted incentives are what we need to find.

Which brings me to the other happy place. Superannuation. Maybe there is a way to provide tax concessions that can make higher risk investments in tech companies more attractive.

Innovation Australia chairman Nicholas Gruen makes some valuable observations on superannuation incentives in the organisation’s second round submission to the Financial Services Inquiry. It is worth a read. You can see it here.

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