Tax incentives to help startups, funding for CSIRO unit Data61, and a new entrepreneur visa are all part of the Turnbull government’s National Innovation and Science Agenda released on Monday.
The agenda, which includes 24 measures, but little in the way of new big ticket items, aims to grow private sector investment in research commercialisation and increase the flow of venture capital to high potential startups.
“We’re not actually looking for big spending items, we’re looking for the change to the culture in our economy,” said Industry, Innovation and Science Minister Christopher Pyne.
One of the largest investments (A$106 million) will go towards tax breaks for early stage investors in startups. There will also be a new entrepreneur visa which will be introduced in November 2016.
Prime Minister Malcolm Turnbull said: “Entrepreneurs create jobs, this is why we’re doing so much to encourage new businesses.”
Insolvency laws will also be changed in 2017 to encourage calculated risk taking, and the current default bankruptcy period reduced from three years to one.
“We’ve got to be prepared to have a go and be more prepared to embrace risk and experimentation,” Turnbull said.
Our experts respond below to some of the agenda’s major initiatives.
Tax breaks for angel investors
The government will offer tax incentives for investors in startups including a 20% tax offset based on the amount of their investment capped at A$200,000 per investor, per year. There will also be a 10 year capital gains tax exemption for investments held for three years. This will apply to businesses have expenditure less than $1 million and income less than $200,000 in the previous income year.
Helen Hodgson, Associate Professor, Curtin Law School, Curtin Business School, Curtin University
Being non-refundable, the tax offset for startup investors is limited to the amount of tax payable by the investor. The 20% write-off is consistent with existing tax provisions that allow the startup cost of a business to be deducted over five years.
The key differences are that this is a tax offset instead of a deduction, and it is allowed to the investor rather than the company. Accordingly the tax benefit is available even if the company does not make a profit. A similar offset, at 10%, will be available where an investment is in a venture capital limited partnership.
The three year minimum holding period for the capital gains tax (CGT) concession should limit “churn” - where investors withdraw funds before the company has had time to become established. But it is not clear how the 10 year exemption will operate. Does it exempt investments sold within 10 years, or is it an ongoing exemption based on the value of the shares after 10 years? It is also not clear whether the value of the investment will be adjusted to allow for the 20% offset, or whether the two concessions will interact to allow double dipping.
Further changes will allow companies making losses to adopt new business models by relaxing the “same business test” that restricts the ability to deduct losses; and changes to employee share scheme disclosure requirements to protect commercial confidentiality will complement the ESS startup tax concessions that were introduced earlier this year.
The government has not moved to amend the sometimes controversial R&D tax incentive that costs taxpayers $2.9 billion each year.
Roy Green, Dean of UTS Business School
While tax incentives for investors in startups are welcome, the broader debate about tax concessions versus targeted spending is not resolved in this report. This is perhaps understandable given the limited time in which the Government’s innovation and science agenda has been prepared. However, we’ve now got to have a serious debate as a country about the relative impact of tax incentives and targeted spending. There’s evidence running both ways internationally, but there’s no reliable domestic evidence as a proper assessment has not yet been attempted.
Currently the R&D tax incentive accounts for $2.9 billion, or about a third of the $9.7 billion spent annually on research and innovation, up from 15% in 2008. However, no-one at the moment can say on the basis of statistical evidence whether there is any “additionality” in this incentive, or any cause and effect relationship. The currently available evidence, albeit compelling in some cases, is anecdotal. So it’s very welcome that the PM’s statement encompasses the prospect of a rigorous analysis to ensure that future policy is evidence-based, including addressing weaknesses in industry-university collaboration.
Insolvency laws relaxed
Helen Anderson, Associate Dean Undergraduate, Melbourne Law School, University of Melbourne
The three insolvency measures outlined in today’s National Innovation and Science Agenda release aim to help those involved in financial failure. The promised legislation will reduce the current default bankruptcy from three years to one year, introduce a “safe harbour” against insolvent trading liability for those who seek to restructure with the help of an advisor, and, in certain circumstances, remove “ipso facto” clauses which terminate contracts upon insolvency, if a company is undertaking a restructure.
The first and third are uncontroversial, as they include relevant safeguards against abuse. Reducing the default bankruptcy period will allow innocent entrepreneurs to re-enter the business arena. Ipso facto clauses unnecessarily impede legitimate business restructures. The safe harbour recommendation, on the other hand, may unwittingly shield those involved in illegal phoenix activity where the restructuring advisor assists the directors to remove assets from creditors’ reach.
Interestingly, the measures come on the same day the Productivity Commission has released its final report into business set-up, transfer and closure. Assistant Treasurer Kelly O’Dwyer last Thursday also released the latest version of the Insolvency Law Reform Bill 2015. The insolvency-related detail missing from the agenda release can be found in the Productivity Commission’s report.
Collaboration and commercialisation of research
To promote international collaboration the government will spend $11 million establishing five “landing-pads” in Silicon Valley, Tel Aviv and three other locations to support entrepreneurial Australians. It will also provide $22 million in seed funding for international research-industry clusters.
Around $200 million will be allocated to CSIRO to help fund start-ups generated by researchers.
Roy Green, Dean of UTS Business School
The framework is possibly more important for the signals it sends than the individual measures it contains, which is quite a list. Some of the measures restore funding to something like where it was and where it should be in key areas such as research infrastructure. Some expenditures that are new and not particularly different from other countries are simply catch-up to where other countries have got to, but at least we are seeing a clear commitment to the future of Australia’s post-mining boom economy.
There’s very much a sense that this is the first instalment in a longer term strategy, as it must be. If it was just a one-off it wouldn’t amount to very much, but given the personal interest of the PM in the research and innovation space, I think we can take him at his word that he’s genuinely wanting to foster an “ideas boom”. Simply by saying so and putting a number of measures in place to facilitate it, he starts to change the mindset of the country. It is also encouraging as well to see considerable overlap with the policy of the Federal Opposition. The impact of leadership on behavioural change is not to be underestimated.
A new provisional entrepreneur visa will be offered for entrepreneurs with “innovative ideas and financial backing”. The government will also enhance its pathway to permanent residence for postgraduate researchers with STEM qualifications.
Jock Collins, Professor of Social Economics, UTS Business School
We’ve had a long history of business migration pathways to Australia and they’ve been refined over time. For example the government recently introduced an investor visa, but the Productivity Commission recommended it be axed.
The question is whether there’s an argument for a new visa type and in what way it would be different from existing business migration pathways.
Targeting immigrants with entrepreneurial skills is a good thing as we’re in competition with Canada, the US and Europe for these people. It’s a competitive race so any changes that make us more effective in drawing on that international pool is a good thing.
But at the same time the government should focus on helping immigrants who are already here make the transition to entrepreneurship and innovation. A lot of the research I’ve done suggests while there’s a great will and ability among immigrants, there’s a big gap in terms of support to help them establish a business in the first instance.
The government will introduce new laws to enable crowdsourced equity funding of public companies with a turnover and gross assets of less than A$5 million. Investments will be limited to a maximum amount of $10,000 per company, per year.
Jason Zein, Associate Professor, UNSW Australia
It is certainly a positive development that the government has removed the barriers startups face in accessing seed capital through crowdfunding. However, startups will still be forced to become public companies and it is unclear whether the benefits of crowdsourced equity will outweigh any potential compliance costs - albeit they will be initially exempt from the normal reporting and disclosure requirements.
I think the sustainability of the market for crowdfunding is going to be a critical issue. From the investors perspective, the harsh reality of startup investing is that most ventures will never deliver sufficient returns to justify the risks. Its only the “unicorns” or the home run investments which pay for all the failures and make the whole process worthwhile.
The bottom line is that to be sustainable, the crowdfunding market will need to deliver some flagship successes stories. Professional venture capitalists have about a 1 in 10 success rate (at best) at picking winners. So the question is can mum and dad investors do any better? Without such winners investors may shy away from future participation. The precedent for this is the ASX. Through time Australian investors have become averse to young, risky tech stocks (this is one on the reasons Atlassian listed overseas). In contrast they appear to be enamoured with large, more predictable, high dividend paying stocks.
For these reasons I think its important to place limits on investment size, as limiting size encourage diversification which maximises the chances of gaining exposure to a “winner”.
Its not all doom and gloom for crowd sourced equity investors. On the flip side, most of the massive returns that startups make happen before they go public. So giving mums and dads the opportunity to participate in this is great. They just need to understand the risks, and not put all their eggs in one basket.