Everyone is talking about an ecosystem – a startup ecosystem, an innovation ecosystem, an early-stage ecosystem.
The first and the last are pretty much the same thing, the middle one perhaps not. But what they all have in common is that they demand sustained effort, sustained change and a fundamental shift into the habit of collaboration.
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To do that we need to get the taxation incentives model right for Australia.
A good place to start is to ask that our government models its measures on the UK Enterprise Investment Scheme (EIS). The UK also has the Seed Enterprise Investment Scheme (SEIS)
The precise details of the Turnbull government’s proposed legislation have not yet been made public, so we only have the broad brush description of the National Innovation and Science Agenda:
- 20% non-refundable tax offset based on the amount of the investment;
- Capital gains tax exemption
The EIS offers the following for the eligible combination of investor and company:
Eligibility to claim tax relief:
- All shares must be paid in full, in cash, when they are issued.
- Shares must be full-risk ordinary shares
- No convertible notes and only very limited opportunity for preference shares
- No arrangements to protect the investor from the normal risks of investing in shares
- No arrangements at the time of investment for the shares to be sold at the end of the relevant period.
- The shares may not be acquired using a special terms loan.
- Company owners cannot agree to invest in each other’s companies in order to obtain tax relief.
- No financial engineering just to access the tax relief.
- Company must be an unlisted company and have no plans to list
- Maximum of £5,000,000 raised by EIS eligible company in any rolling 12 months can be subject to EIS benefits
- Company gross assets prior to investment must be less than £15,000,000 and less than £16,000,000 after investment
- Company has fewer than 250 full-time equivalent employees
- The company must register with the regulator to qualify its investors for tax relief
Income Tax Relief
- 30% of the value of the investment as non-refundable reduction of Income Tax Liability
- Maximum investment of £1,000,000 per year, i.e. maximum reduction of £300,000
- Individuals investing directly or through a nominee (this could be adapted to cater to our SMSF).
- Shares must be held for 3 years or Income Tax relief may be withdrawn
- ‘Carry back’ option to take up tax reduction in the year prior to the investment
Capital gains Tax Exemption
- Shares held for three years and subject to Income Tax Relief are fully exempted from tax on any realised capital gain thereafter. In the UK CGT is 28%.
- If the shares realise a capital loss, that loss (less any Income Tax Relief already received) can be used to reduce taxable income in the year the loss is realised, or in the previous year.
Capital Gain Rollover Relief
- Any individual who realises a capital gain from the sale of any asset can defer CGT liability by reinvesting that gain in an EIS qualifying company within 1 year prior or 3 years after the gain was realised.
SEIS or EIS
The SEIS limits the maximum a company can ever receive to £150,000 ($312,000), so it’s a tax scheme for very small seed investment.
That’s too little, too late for Australia. We want a tax scheme that keeps angels funding companies through to exit, especially given the very shallow pool of VC in Australia for the foreseeable future.
I hope that our government will consider modelling on the EIS, increasing the income tax relief to 30%, remove the 10-year cap on CGT relief, broaden the share type to allow normal angel-style preferences, accommodate SMSF as investment vehicles and use fund raising caps that are relevant to our context.
Together with fixing the still broken Employee Share Scheme regime these measures could go a long way to increasing participation and collaboration in the early-stage ecosystem.
Success for Australia in the new innovation economy has many aspects but for the startup community it is fundamentally about dramatically increasing the number and diversity of startups.
That means liberating a much higher volume of direct private investment and the right tax incentives will really help.
Jordan Green is the founder and president of Melbourne Angels.
This piece was first published on LinkedIn. Read the original version here.