Starting a company in Australia, especially one in the high tech sector, is fraught with challenges that are simply not present in other regions around the world. There are numerous other factors which have limited the growth of our startup ecosystem, many of which are centred around getting new ideas funded. For many the biggest challenge comes when they want to grow their business beyond the bootstrap phase, where they look to venture capitalists to help with their expansion. Australia’s regulatory framework, coupled with our traditionally risk adverse investor network means that the large amounts of capital we do have (thanks to the superannuation scheme) are often locked away from startups. This, combined with the numerous other challenges Australian startups face, have seen many great business go overseas in their pursuit of success. Today however Malcolm Turnbull has announced numerous initiatives totalling over $1 billion in new funding to kick start Australia’s startup ecosystem.
At a purely financial level the changes that are being made to investing in startups in Australia is significant, putting it on par with other investment vehicles. For starters any early stage investment in a startup company (which seems to be broadly defined as a company making less than $200K/year, with less than $1 million in expenses) attracts a 20% offset against the investor’s taxable income. That’s essentially a one off negative gearing payment, reducing the risk of the investment by up to 10% or so (for the highest marginal rate). Additionally that investment, if held for for more than 3 years, is exempt from capital gains for 10 years. This means early stage investors who happen upon the sacred unicorn aren’t going to be burdened with a large tax bill when they sell their stake. It might not sound like much for regular investors but for angels looking to invest in Australia startups the proposition just became a whole lot more tenable.
In addition to this there are several more initiatives designed to allow startups to depreciate intangible assets (like acquired patents), recoup losses and a better insolvency framework so that entrepreneurs aren’t unduly affected by failed businesses. Whilst your’e able to depreciate intangible assets now the actual useful life of them might not be in line with the legally required framework. Under the new legislation startups can self assess the effective life of such assets, allowing them to recoup the losses more quickly.
Additionally, under previous legislation, losses like this that incurred more funding (and hence a change in ownership) would prevent the startup from offsetting those losses against future income due to the “same business test“. The new legislation changes this test to a “predominately similar business test” which means changes in ownership like that, which are somewhat common with startups, won’t see those losses negated.
Finally the reforms to the insolvency framework allow entrepreneurs to tackle the kinds of risky ideas that these companies are known for without the spectre of bankruptcy looming over them. The default bankruptcy period has been reduced to one year from three, allowing them to return to the startup community much faster. There’s also a new safe harbour provision which allows company directors (typically the founders) to avoid personal liability for an insolvent company if they appoint a restructuring advisor to help bring the company back into the black. This eliminates some of the potential risk that’s inherent in reducing the bankruptcy period (as, hopefully, less companies should go bankrupt) whilst also opening up a secondary industry to veteran entrepreneurs to help right the ship of a failing startup.
There’s also a myriad of new funding for a bunch of programs that are intended to spur on research, inspire students to pursue STEM careers and initiatives to attract and retain talent both here in Australia and overseas. All of these programs are necessary pipelines that will feed the Australian startup ecosystem with the talent it will need to grow and sustain itself long term and it’s great to see the Turnbull government recognizing this.
All told there are over 20 new initiatives that have been discussed each of which is designed to build up momentum for the Australian startup economy. Whilst I’d be remiss if I didn’t mention that a lot of the ideas were lifted from a previous proposal from Labor it’s still great to see the Liberal party championing it. Hopefully this means that many of the initiatives will pass with both party’s support and soon we’ll start to see the benefits far in excess of the projected costs. Personally I hope this spurs on our superannuation industry to start looking at startup investing seriously as there’s vast amounts of capital, only a small fraction of which would be needed to see amazing returns, just waiting to be used. No matter what happens though the future is looking incredibly bright for startups in Australia and that makes this humble writer incredibly happy.