Kickstarting Aussie Startups - Qualified Small Businesses

Succeeding as an entrepreneur can be difficult at the best of times, and doing so Down Under can be doubly so. Firstly, there are the tyrannies of distance and a smallish population that we all learned in school, i.e., limited domestic market, limited access to capital, and remoteness from global markets, etc. Secondly, there are those vestigial "cultural inhibitors", such as Aussie poppy-lopping tendencies and the abuse paid out to failed entrepreneurs. Last, but not least, there are few tangible incentives for investors to back Aussie startup companies over conventional investments. 

Helping startup companies to succeed should be one of our top national priorities though. In that spirit, I’d like to offer a few suggestions that could make a real difference to kickstarting startup activity in Australia, heavily influenced by my years spent in Silicon Valley.

Opportunity #1 
In Australia there are no general tax incentives for investors to invest in small businesses .

Over the years there have been some specific incentives limited to particular industries, such as the film industry. More recently, the Clean Energy Finance Corporation (CEFC) was set up by the Australian Government to encourage investment in clean technology. Specialized programs can be useful, but they limit the pool of investors and they require governments to pick winners - neither great!  As a consequence, many investors in Australia have traditionally tended to  go with safe conventional investments, such as property or mining.

In contrast, US tax law defines a class of business, known as qualified small business (QSB), for which there are tax breaks to encourage investment. Section 1045 of the US tax code allows taxpayers (other than corporations) that have held stock in a QSB for more than 6 months to defer the gain on the sale of such stock if they reinvest the proceeds of the sale in another QSB (within 60 days of the sale). This is a very good incentive to encourage investment in startup companies (although the 60-day provision is usually way too short to identify and invest in another company.) 

The UK took a different approach recently with the introduction of their Seed Enterprise Investment Scheme (SEIS), which encourages investments into startups by offering a straight 50% tax break to those investing up to £100,000, regardless of their normal tax rate.  It is more generous than the US QSB scheme in that it enables tax relief in the tax year that the investment is made, but it has been criticized for having unwieldy rules that discourage regular retail investors though.

Proposal #1

Implement an Australian QSB model, implementing the best of the US and UK models.  For example, extending the re-investment rollover grace period to at least 1 year makes sense. Also, allowing some upfront tax breaks is desirable, although it is not clear that they need to be as generous as the UK SEIS model. The key thing is to provide general incentives to encourage investment in startups that are not limited to specific industries.

Next time, “Tapping into Super Funds”.