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B​udget 2016: A "missed opportunity" for startups

B​udget 2016: A "missed opportunity" for startups

Peak industry bodies say budget lacks bold and substantial action on startups

Tax cuts for SMBs and increased access to startup investment are both key features of the 2016 federal budget, announced by Treasurer Scott Morrison on Tuesday night. But peak industry bodies have described the budget as a "missed opportunity" to support startups.

As part of a new enterprise investment scheme, angel investors and venture capitalists supporting Australian startups will have greater access to tax offsets granted they meet specific criteria, while small to medium businesses (SMBs) and their employees will benefit from tax cuts as part of a 10-year enterprise tax plan.

Despite these changes, StartupAUS, Australia's peak advocacy group for startups, said overall this budget was a disappointment, with few advances on previous measures.

“This budget was a chance for the government to make good on its rhetoric about continuing to build momentum on innovation and Australia’s economic transition. But, from that perspective, it is a disappointment,” said StartupAUS CEO, Alex McCauley.

“We welcome the limited support for Fintech in this budget, as well as the extension of the new enterprise investment scheme … but these are small, niche measures in an area that still requires bold, substantial action,” he said.

Reduced holding periods for angel investors

The government has amended the Mid-Year Economic and Fiscal Outlook 2015-16, in support of the National Innovation and Science Agenda (NISA), to include greater tax incentives for early stage ‘angel’ investors looking to support startups.

The newly implemented incentives will allow angel investors in startup companies to claim the 10-year capital gains tax exemption after a holding period of just 12 months, reduced from three years in 2015.

Investments from non-sophisticated investors will be limited to $50,000 or less per income year should they wish to access the tax offset.

Angel investors must not be affiliated with the business to benefit from the new scheme. Startups will be considered eligible based on a time limit for incorporation, and whether the business meets the criteria to be deemed an ‘innovation company’.

This new measure is estimated to have a cost-to-revenue of $45.0 million over the forward estimates period.

Greater funding options for venture capitalists

Further amendments following the NISA include new arrangements for venture capitalists to attract more early-stage support for startup companies.

Early Stage Venture Capital Limited Partnership (ESVCLPs) and venture capital limited partnership (VCLPs) are investment vehicles that provide tax exemptions for those investing in innovative companies at the early and growth stages of the startup life-cycle.

The new budget extends the maximum fund size for new and existing ESVCLPs from $100 million to $200 million, and relaxes the requirement for very small entities to provide an auditors' statement of assets.

A new transitional arrangement for VCLPs was also introduced to allow funds that became ‘unconditionally registered’ after 7 December 2015 to still access the tax offset.

The government said these new measures are expected to have “an unquantifiable cost” to revenue over the forward estimates period.

Despite broader disappointment, StartupAUS described the new tax incentives for startup investors, which is based on a similar scheme in the UK, as "a huge win for Aussie startups" that "will rapidly increase the amount of capital available to them, and the sources of capital they can call on".

"Research by Deloitte suggests the number of angel investors [in the UK] increased by 58 per cent within a very short time after the scheme was introduced. If we see those kinds of numbers, Australian entrepreneurs will enjoy substantial improvements to their ability to access early-stage capital and investor talent."

Tax discount for SMBs

The budget’s new Ten Year Enterprise Tax Plan aims to increase the unincorporated small business tax discount to support job creation and growth.

The tax discount for small businesses will increase incrementally over 10 years. The offset will grow from 5 per cent to 8 per cent as of 1 July 2016, and remain constant at 8 per cent for eight years.

It will then increase to 10 per cent in 2024-25, 13 per cent in 2025-26, and reach a new permanent discount of 16 per cent in 2026-27.

This will coincide with staggered cuts in the corporate tax rate to 25 per cent, while the tax rate for businesses with an annual aggregated turnover of less than $10 million will be 27.5 per cent from the 2016-17 income year. Previously, this reduced rate was only accessible to companies with a turnover of $2 million or less.

This threshold is intended to be progressively increased to ultimately have all companies at 27.5 per cent in the 2023-24 income year.

“Small and medium businesses are driving jobs growth in Australia and must continue to do so,” said Morrison during the budget announcement.

“They are also overwhelmingly Australian-owned, and more likely to reinvest their earnings in future growth, as they seek to build their businesses.

“A tax on their businesses is a tax on their enterprise and the jobs they provide.

New measures are old news

According to StartupAUS, there is little in this budget to advance the government’s support for innovation and entrepreneurship, as almost all new measures had been announced as part of the NISA six months ago.

“[The government] has been describing the NISA as a platform from which it will be able to deliver bold, decisive action in this space. This budget was a missed opportunity to make good on that promise,” said McCauley.

“The budget address contained a lot of rhetoric around jobs and growth. The reality is, both jobs and growth and our national economic advantage won’t come from savings or these tax cuts alone, it will come from innovative business practices within existing businesses and startups,” added Peter Bradd – founding director & chairman of StartupAUS, and founding director of Fishburners.

“When you consider the ASX top 20 delivers 50 per cent of Australia’s GDP, the obvious question is how can we get the ASX 20 to reinvest more of their earnings in R&D to drive greater growth? Today’s budget did not address that question.

“Unfortunately, much of the government's innovation investment to-date has been tilted towards traditional academic areas and government enterprise, neither of which have a good track-record of producing commercially compelling outcomes or jobs.”

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Tags startupsinnovationGovernment fundingstartup investmentNational Innovation and Science AgendaBudget 2016

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