Australian FinTech startups will be included in the range of angel and venture capital investor incentives and tax breaks on offer under new legislation, but concerns have been raised over an existing hurdle that may lock out most of these companies.
The draft federal legislation released for consultation on Tuesday, makes the range of taxation incentives announced as part of the government’s National Innovation and Science Agenda in late 2015 available to local, early-stage FinTechs.
These include the changes to Venture Capital Limited Partnerships (VCLPs) and Early Stage Venture Capital Limited Partnerships (ESVCLPs), along with tax incentives on offer for early-stage startup investors.
These tax incentives for investors currently aren’t eligible for investments in finance or insurance activities, which rules out most FinTech companies. The government’s draft legislation removes this exception, opening up the tax incentives for investors looking to dish out dollars to local FinTechs.
“The proposed amendments highlight the Turnbull government’s commitment to promoting innovation, by incentivising investors to support innovative, high-growth potential startups,” Treasurer Scott Morrison said.
“The amendments will ensure that investments in FinTech businesses can access support under each program.”
The national Innovation Statement, unveiled by Prime Minister Malcolm Turnbull in December 2015, included a range of tax breaks and incentives for investments in early-stage innovation companies.
These included a new ten per cent tax offset to partners in new ESVCLPs, increasing the maximum size of ESVCLPs to $200 million, a 20 per cent tax offset for startup investors, and a ten-year exemption from the capital gains tax for investments held for at least a year.
But FinTech startups weren’t included in any of this due to an “oversight”, according to MoneyPlace chief executive Stuart Stoyan.
“This is great because it immediately addressed the primary oversight of the initial legislation on this to exclude FinTechs,” Mr Stoyan told InnovationAus.com.
“That wasn’t an active exclusion but it was just something that happened through the process. The fact the treasurer is rectifying a prior oversight and allowing FinTechs to be included is fantastic,” he said.
“The general tone is encouraging and it’s good to see, but I’d like it to go further.”
Mr Stoyan, who is also a member of the government’s FinTech Advisory Group, said the existing expenditure hurdle, which rules that a company must have total expenses of less than $1 million in the last income year to qualify as an early-stage company, will lock out most local FinTechs from the incentives anyway.
“FinTechs by their very nature are typically more expense-heavy than other startups. FinTechs that now fall under the previous legislation still wouldn’t qualify because they’d get dinged on their level of expense,” he said.
“Total expenses of $1 million isn’t actually that much in the context of a FinTech developing robust, sophisticated technology that works in banking and financial services environment,” he said.
Mr Stoyan said that he hopes the government will listen to feedback and amend the expenditure cap following the consultation period.
“While this is good for very, very early stage FinTechs, it is less good for early stage FinTechs that may have already hit the $1 million expense limit.
“What we want to see is some modification in income and expenditure hurdles which will make this very, very valuable policy initiative available to more FinTechs, and hopefully through the consultation process we’d expect these issues to be flagged and addressed.”
“The general tone is encouraging, but I’d like to see it go further,” he said.
In its draft explanatory memorandum, government said the amendments aim to ensure that investments in FinTech startups can access these same tax breaks and incentives, and remove uncertainty surrounding the eligibility of finance and insurance companies.
The amendments make these finance and insurance companies counted as venture capital investments, and eligible for the tax breaks, as long as the company is less than three years old and passes the expenditure and income tests.
The draft legislation also includes a series of other small changes to these investment programs to “rectify a number of minor technical issues”.
These include amendments to remove the doubt surrounding the capital gains tax exemption, investment requirements for ESVCLPs and the definition of a public trading trust.
The amendments also make foreign companies no longer able to be counted as early-stage innovation companies, and allow managed investment trusts to invest in ESVCLPs or VCLPs.
Submissions on the draft legislation are open until 10 November.