Startups seek the devils in the detail

James Riley
Editorial Director

Malcolm Turnbull’s Coalition government hopes to light a fire under Australia’s startup community with new incentives ranging from investor tax breaks to more liberal treatment of insolvency. But the devil in the detail will need to exorcised to quell potential rorting and a possible short-term investment drought.

The Prime Minister, who joined the seriously rich through tech investing when his $500,000 stake in pioneer ISP Ozemail blossomed into $50 million back in the nineties, rolled out his government’s Innovation Statement yesterday, with a little help from Industry Innovation and Science Minister Christopher Pyne.

In a theme he has been belting out for many years, the PM said Australia needed to find new avenues of growth and that encouraging tech related industry was vital. “We need new sources of growth if we are to maintain our high wages, high standards of living and generous welfare safety net,” Mr Turnbull said.

Jonathan Barouch: New offshore skills sourcing incentives are great news

“Although there are challenges there has never been a better time to start and grow businesses from Australia, he said.

Mr Turnbull played Santa to the startup sector with a range of measures designed to bring more funding opportunities and less risk to an area where the government estimates more than 4500 startups miss out on capital every year.

From July 1, 2016, Early Stage Venture Capital Limited Partnerships score a 10 per cent non-refundable tax offset on capital invested in startup companies and the maximum fund size for new ESVCLPs increases from $100 million to $200 million. ESVCLPs will no longer need to exit a company when its value exceeds $250 million.

Meanwhile, very early stage investors also scored a major new tax break. 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.

What remains unclear is how the government will define what a startup is for purposes of the investor tax incentives which are slated to appear sometime in 2016.

So far, it appears that the online equivalent of a corner store could employ off-the-shelf e-commerce tools to make itself look like a tech startup, raise capital and have its investors enjoy the new tax benefits.
Mr Turnbull said the definition of a startup was a work in progress.

“We obviously have a highly developed concept of the type of business we are talking about but we’ll develop the final definition collaboratively with the industry and with the advice of Innovation Science Australia, said Turnbull during Q&A after the Innovation Statement release.

“It’s important to make sure you get that right because often the devil is in the detail,” he said.

When interviewed on this issue on Sky News, Christopher Pyne indicated the rules would be at the looser end of the spectrum. “There will be defined rules,” he said. “But we are trying to be more open rather less.”

Bridget Loudon, CEO and co-founder of Sydney-based Expert360 – which provides access to a global pool of consultants for projects on demand – hailed the Innovation Statement measures, but cautioned they may cause 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 said.

“It’s a 20 per cent deductible offset, which is more or less equivalent to a 50 per cent taxable income deduction, but easier to administer. 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.”

Steve Barrett, CEO and co-founder of Adelaide-based visitor management software outfit goreception began his startup journey in 2012 and is on the hunt for more capital.

“We welcome reform around tax incentives for investors, it helps remove barriers and red tape,” he said, adding that trying to raise money in the $250K to $500K range could be difficult. “Conversations take a lot of time.”

He believes the measures are a good start, but agrees that startup definitions need to be locked down to avoid rorting.

Other measures in the Innovation Statement helping startups included a new Incubator Support Programme that should help fund new incubators and accelerators in regional Australia, changes to the insolvency laws due in 2017 that should make it easier for companies to avoid receivership and trade out of difficulties, and the relaxing of the “same business test” so that firms can still access prior year losses if they have to ‘pivot’ from one business plan to another.

The tech skills scarcity gets help by easing visa requirements for incoming entrepreneurs with ideas and money, and a quicker path to permanent residency for postgrads with STEM qualification.

Jonathan Barouch, a serial entrepreneur whose latest outfit Local Measure provides social media insights for businesses, was very supportive of all the Innovation Statement programs but felt the $200,000 income cap to be eligible was too low.

“I would have thought a couple of million dollars in income is still an early stage technology company. I think $200,000 is a little bit low,” he said.

Mr Barouch particularly likes the new offshore skills sourcing incentives, such as the new entrepreneur visa.
Beau Bertoli, the CEO of online business lender Prospa said the government’s package “hit the mark on what the country needs to foster innovation.”

Mr Bertoli thought the investor tax breaks were key for bumping up the money flow around good ideas and like Mr Barouch, was also keen on the new visa arrangements for skilled migrants.

“We recently got named as Australia’s fastest growing technology company, and our Number One challenge is finding fresh talent,” he said.

However he wishes some of the tax break largesse extended to small startups was widened to help larger outfits like Prospa.

“We still come up with great innovations and it takes investment money, no matter how big you get to bring those ideas to life.”

Pointing to caps of $200,000 in revenue and $1 million in opex for companies to be eligible for the investor tax breaks, Mr Bertoli said “it would be great to see those metrics as larger.”

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