Startups caught in seed tax changes


James Riley
Editorial Director

Brass could be in short supply for cash-strapped startups as investors shy away from new investments until the federal government’s new tax breaks kick-in from July, but relief may arrive as early as the end of this month.

There are a number of nasties which could lead to a dearth of startup funds in the next six months, including the generally bearish investment vibe as global stock markets tank. But the biggest problem may lie in what should be a bag of government goodies for the early venture scene.

The goody bag sits inside Prime Minister Malcolm Turnbull’s Innovation Statement which was met with much euphoria among startups when it was released in early December.

VC drought: AVCAL’s Yasser El-Ansary is confident of a fix

Along with some nice rhetoric acknowledging that a boom in smart, commercially viable ideas could go forever, unlike our clapped out mining boom, Turnbull’s $1.1 billion innovation package contained a range of measures designed to help startups.

These included $106 million in tax incentives for angel investors. There’s a 20 per cent non-refundable tax offset based on the amount of their investment capped at $200,000 per investor, per year and a 10 year capital gains tax exemption for investments held for three years.

To be eligible, companies must have incorporated during the last three income years, cannot have listed on any stock exchange and must have expenditure less than $1 million and income less than $200,000 in the previous income year.

The government will also relax insolvency laws for failed start-ups by reducing the default bankruptcy period from three years to one.

Unfortunately for startups facing urgent capital needs right now, these goodies don’t kick in until July 16, and some may end up benefitting more from the bankruptcy measures than the tax incentives for angels.

If potential investors delay putting money into startups until the new financial year – so as to benefit from the new tax breaks – it could make for a tricky five months for early stage ventures hungry for angel funds.

“It’s a hard slog getting funding in Australia,” says Monica Wulff, who runs early venture tracking outfit Startup Muster, which produces a detailed and well respected survey of the local start-up scene. Startup Muster will next month begin surveys to produce the 2016 report.

According to Startup Muster’s 2015 survey, about 28 percent of startups that try to get funding don’t succeed. The federal government estimates more than 4500 startups miss out on capital every year.

It could be even harder to get hold of angel capital in coming months while investors wait for the tax incentives to kick in come July 1.

“From a business perspective that might have an effect on the ability of a start-up to access funding,” says Ms Wulff.

“It might not seem like a long period of time for a corporation, but for a startup it can mean life or death.”

Ms Wulff allows that at the moment, a short term drought of startup funds due to the tax break gap is more a hypothesis than proven reality, and she is supportive of the federal innovation measures which have put a positive spotlight on the startup scene.

Bridget Loudon, CEO and co-founder of Sydney-based Expert360 cautioned at the time of the release of the Innovation Statement that there may be a short-term funding drought while investors waited for the tax breaks to kick in.

“The tax incentives is probably one of the biggest game changers in the medium term for the Australian ecosystem,” Ms Loudon told InnovationAus.com back in December.

“The only critical piece the government should consider is to backdate today’s announcement. Otherwise, we will see an instant drought of angel capital in Australia as investors wait for tax deductible legislation. This would be an issue,’ she said.

Help may be at hand.

The Australian Private Equity and Venture Capital Association has been in talks with the federal government over the tax break gap problem and AVCAL CEO Yasser El-Ansary says the government is aware of the possible short term threat to funding.

AVCAL has suggested a range of transitional measures including simply making the tax break retrospective to any eligible funding made after the release of the Innovation Statement on December 6.

Mr El-Ansary told InnovationAus that he was hopeful that a solution to the tax break gap could come within “two to three weeks.”

In any case, Mr El-Ansary said investors should be making their calls on the putting money into the startup sector based on the worthiness of the ventures, rather than just to get a tax break.

It remains to be seen whether the tax break gap produces a major blow to start-up funding out to July. January, is traditionally a hard time to find funding as corporate Australia winds down for the long summer break. If the gap is going to hurt, it will be during the autumn months ahead.

If I were a start-up running lean right now, I would be counting my pennies until July 1.

Do you know more? Contact James Riley via Email.

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