Australia passes two new tax incentives for startup investors, but skips on new R&D funding

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It was a good day for Australian startups, with the Senate in Canberra announcing two new tax incentives to encourage early-stage investing.

The new initiatives are slated to go into effect with the next national budget for the fiscal year starting July 1. The two parts of the plan include the Tax Incentive for Early Stage Investors and the New Arrangements for Venture Capital Limited Partnerships. 

There will be a 20% offset capped at AU$200,000, and a 10-year tax exemption for certain investments.

The plan allows Early Stage Venture Capital Limited Partnerships (ESVCLP) to expand from a maximum size of AU$100 million to AU$200 million.

“Last night was a quiet night for startups, but there has been some fantastic work going on behind the scenes over the last few months to finalize tax incentives for startup investments,” CEO of StartupAUS Alex McCauley said. “Today the legislation enacting those incentives passed the Senate, with bipartisan support, and became law.”

StartupAUS, as its name implies, is a go-to player and advocate for tech in Australia. They, as you might expect, are enthusiastic about new incentives for investors.

McCauley referred to the existence of similar incentives in the United Kingdom. He referred to research by Deloitte saying that 58% of angel investors surveyed in 2013 had increased their investing relative to the previous years which did not have incentives.

“If we see those kinds of numbers, Australian entrepreneurs will enjoy substantial improvements to their ability to access early-stage capital and investor talent.”

The government gave itself a pat on the back.

“Over 4,500 start-ups are missing out on equity finance each year,” Minister for Industry, Innovation and Science Christopher Pyne said. “These measures will help start-ups get access to crucial funding to grow their start-up.”

Can Canberra do more?

Canberra Civic viewed from Mount Ainslie with Lake Burley Griffin and Mount Stromlo in the background. (CC BY SA 3.0 Bidgee via Wikimedia Commons)
Canberra Civic viewed from Mount Ainslie with Lake Burley Griffin and Mount Stromlo in the background. (CC BY SA 3.0 Bidgee via Wikimedia Commons)

There was some criticism though, especially for not including more R&D allocations or direct investments into startups and their programs.

“R&D spending doesn’t feature prominently,” McCauley told The Australian. “This is a disappointing and outdated approach. Australia needs to substantially boost its R&D spending if it wants to measure up to its international competitors — we are well outside the top 10 countries globally both in terms of absolute R & D expenditure, and as a percentage of GPD.”

There was also significant criticism of other aspects of the budget.

“The reality is that there is more new money in this budget to help mining companies prospect for resources (AU$100m) than to help create a supportive environment for our best entrepreneurs to build a high-growth technology company in Australia,” McCauley critiqued in his statement to the press on Tuesday, continuing to say that, “It’s hard to see Australia as genuinely committed to transitioning to a ‘modern economy’ if its key spending priorities are shipbuilding, rail, and un-targeted business tax cuts. That won’t be lost on those watching our progress closely, both here and overseas.”

One specific area of disappointment pertained to allotments for promoting Fintech, which he believed did not go far enough.

“We welcome the limited support for Fintech in this budget, as well as the extension of the NEIS [New Enterprise Investment Scheme]. Support for young people exploring entrepreneurship is important,” said McCauley. “But these are small, niche measures in an area that still requires bold, substantial action.”

The country has a well established financial sector that manages immense assets, and is an area where many feel that Australia can and should be a leader in developing tech solutions.

Australia’s startup landscape is diverse but small, spread out across the country with its main hubs in Sydney and Melbourne. Sydney ranked 16th in the world for ecosystems in 2015 according to Startup Compass, ranking 6th overall in terms of talent and hosting somewhere between 1,500 and 2,300 tech startups. But it ranked 16th in funding, 17th in market reach and 20th in performance. The city only accounted for .1% of the value of global exits.

To be fair, only 12 cities worldwide have more than a full 1% of it. Perth, Brisbane, Adelaide and even Canberra have shown great signs of growth considering the relative scene in Australia.

But because of the small size of the ecosystem, Compass speculated that, “The growth of Melbourne likely took a hit due to its close proximity to the larger startup ecosystem of Sydney. Smaller ecosystems with close proximity to larger ecosystems often have a hard time continuing to grow due to new and existing talent and capital migrating to the larger nearby ecosystem.”

Gabriel Avner contributed to this reporting.

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