BILLS: Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016

25 May 2016

Mr HUSIC(Chifley) (15:31): Labor welcomes the opportunity to make a contribution to this debate on the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016. It is an important contribution. Both sides of politics recognise that changes in this area are required and need to be made for a number of very important reasons. We welcome the opportunity also to add comment to the types of things that are being sought to be achieved through this bill.
Labor certainly recognises that jobs of the future will be generated by todays investment in smart, innovative Australian enterprises. With an estimated two out of every three Australian jobs expected to be impacted upon by automation between now and 2030 the challenge is definitely on to create new jobs. That challenge is serious and demands a serious policy response by government. On our side of the chamber, through the release of three waves of innovation policy Labor has proposed a very comprehensive framework of measures designed to encourage the emergence of new, innovative companies in Australia. These policies include: teaching young Australians coding and the value of computational thinking; boosting the numbers of STEM graduates and qualified STEM teachers; creating a start-up university to help launch 2,000 new enterprises every year; providing a $500 million smart investment fund to back new ideas; and establishing a regional innovation fund to encourage talent in our regions to be actively involved in the nations efforts to become a smarter, richer country. Importantly, Labor has also proposed changes to our taxation system and the rules applying to venture capital in this country, to help ensure money is there to nurture and develop good ideas and to transform them into strong new firms generating jobs of the future.
Why in particular are the types of things that are being encouraged by this bill, and also what the opposition has put forward, important? They are important for a number of reasons. Firstly, and primarily, start-ups typically find it more difficult to access capital than their larger commercial counterparts. This is mainly because of a lack of prior financial history, limited supporting collateral and, ultimately, their risk profile. They are engaged in early-stage innovation, which by its very nature has a greater degree of risk and is something that some financial institutions will not necessarily embrace by extending capital to those types of innovations and to that type of activity at that point and at that stage in their life cycle. It is hard to find that amount of support.
Strengthening capital flows within this ecosystem will deliver substantial support to early-stage innovation. The two major sources of support at this point are, first, angel investmentthat is, high net worth individuals on incomes largely around the $250,000 per annum mark who are willing to dedicate some investment towards early-stage innovation companiesand then, later down the track, you will have venture capital enter the field to also support investment through series A and further investment rounds. However, we have not necessarily had the best track record in this space.
We have had a number of communities support early-stage innovation in this country. For example, I note the important role of people in groups such as Brisbane Angels, Sydney Angels and Melbourne Angels, who I have drawn on for their ideas about what needs to be done in this space. I want to thank them on the public record for their assistance, in particular for at an early point bringing me up to speed on the complexities within this space. There are also groups like Scale Investors, which brings together investors and female entrepreneurs to try to boost the level of female entrepreneurship in this country. That is a major challenge which does need to be addressed a lot more vigorously, and I congratulate them and the other angel investors who, quite frankly, have been willing to put their hands into their own pockets to support early-stage investment and innovation without the need for a tax incentive.
While we are very supportive of the types of arrangements that are being put forward in this bill, it is important to place on the public record our gratitude for the investment that angel investors in past years have been willing to direct to early-stage innovation in this country. I certainly think that that is important for us to recognise in this place. We now seek to boost this through these types of arrangements. And to boost it the challenge is real. Angel investors, for example, in 40 deals in 2012 directed about $21 million. We have to do more to lift that figure. It is great that people have been willing to do that, but we need to find a way to unlock capital to ensure that new enterprises emerge and that they create the jobs that Australians will require in the years ahead.
In relation to what is happening in other parts of the world: the UK government, for example, introduced the Seed Enterprise Investment Scheme in 2012 and that recognised in that jurisdiction there were particular difficulties which early stage companies faced in attracting capital. They have had a degree of success. In fact, so much so that both sides of politics in this country have watched very closely the framework that was put in place in the UK and you can see the way it has influenced our respective policy responses. The official United Kingdom HM Revenue and Customs statistics show, for example, that in 2013-14 alone almost 2,000 companies received investment through the Seed Enterprise Investment Scheme, with around 164 million pounds in funds raised for early stage start-ups. Some of the reports that have looked into the success of this scheme in the UK angel market found that promoting angel investing through, for example, Deloittes work promoting angel investing as an asset class with substantial tax benefits is regarded as an important factor to attract new angel investments into the market.
Further, they noted that many angels that they had interviewed had said that they would not have invested in their seed deals without that level of support. It is the type of support that we are trying to encourage in this country. Both sides of politics focused on this, though, admittedly, there are some variations in the way in which we would approach it. But that support in the UK is paying off. For example, when you look at the statistics, nearly 3,000 start-ups received support through that scheme. You cannot for a moment ignore what that would have done in boosting the chances of those enterprises going on to be larger concerns, generating jobs and also making a difference in that UK start-up ecosystem. We certainly see that there is importance in doing that.
On our side of the political fence, we also argued for reforms to the early stage venture capital limited partnerships. We note that this legislation will make some changes in this space. We certainly believe that venture capital funds of between $10 million and $100 million invested in Australian businesses are entitled to preferential tax treatment through the ESVCPL program and that entitles a fund to flow-through tax treatment and its investors to receive a complete tax exemption on their share of the funds income, both revenue and capital. We outlined further changes that we believed could be embraced to promote this. We note that this will be an area that we will continue to focus on should we be granted the opportunity to gain government.
We welcome the fact that the governments announced policies via this bill reflect, in large part, the ideas that we spelt out in November last year, in particular to introduce an Australian angel investment scheme and liberalise the early stage venture capital limited partnership framework. In relation to the angel investment scheme, we argued for an up-front 50 per cent tax deduction for investments up to a maximum of $200,000 per annum. We also advocated: a carry-back tax relief mechanism if investors do not reach the maximum $200,000 cap in any particular year, full capital gains tax exemptions for equity held in start-up ventures held for greater than three years, any realised losses following in the scheme could be deducted against wage and salary income, and deferral of capital gains tax on investment if that investor directs a prior capital gain into a new start-up venture to help keep rolling investment and building support in the sector. We want to see support flow through to early stage innovators as quickly as possible and, considering the time remaining in the parliamentary term, the opposition will largely support this bill.
However, we wish to indicate our intention to review some key elements of the bill if we are successful in winning government and we would indicate one area where we believe that both parties could actually work constructively to benefit the start-up community today. The key elements of the governments legislation, Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016, are: tax incentives providing a 20 per cent carry-forward non-refundable offset on investments which will be capped at $200,000 per year, and a 10-year exemption on capital gains tax for investments held in the form of shares in early stage innovation companies, as they will be defined, for at least 12 months, provided the shares held do not constitute more than a 30 per cent interest in an innovation company.
An early stage innovation company, or ESIC, is defined: as an Australian- incorporated company that is in the early stage of its development and developing new or significantly improved innovations with the purpose of commercialisation. The tax offset will be available upon investment, not when the funds are used by the innovation company, and any sale of the shares will be taxed on a deemed capital account basis. A regulation-making power is also included so that measures can be updated as required, which is an important flexibility mechanism. A number of new arrangements to Venture Capital Limited Partnerships and Early Stage Venture Capital Limited Partnerships are being introduced, notably: a non-refundable tax offset of 10 per cent of the value of new capital invested into Early Stage Venture Capital Limited Partnerships during the income year, an increase in the maximum fund size of Early Stage Venture Capital Limited Partnerships from $100 million to $200 million, improved access to funding from managed investment trusts, and broadened and simplified rules for both Venture Capital Limited Partnerships and ESVCLPs. The tax incentives introduced by the bill will be available to all types of investors.
However, considering the high level of risk associated with investment in ESICs, this bill limits the risk exposure of retail investors to no more than $50,000 per year and sophisticated investors will have no restriction placed on the amount of money they wish to invest, bearing in mind that an offset cap will be applied. Once the bill receives royal assent, the incentives will apply to the 2016-17 income year and the government intends to review the incentives after a period of four years to determine how well they are delivering on policy objectives, which we welcome wholeheartedly.
What is good about this bill? The government has applied a principles based and objectives based test to help determine the legitimacy of a company styling itself as an early stage innovation companythat is a good thing. This will attempt to better target the concessions towards genuine innovation companies and should be welcomed in principle. These measures are reinforced via the application of general anti-avoidance rules, which will apply to prevent taxpayers from being able to obtain tax benefits by entering into artificial or contrived arrangements to access the tax offset. That is another important mechanism, which obviously received support from our side. It has been a longstanding provision and it is an important mechanism in there.
There are some elements of the bill that we consider warrant further consideration down the track. Firstand we flagged this to the governmentit appears that start-up founders will be prohibited from accessing the tax concessions provided for in the bill. This does seem a little harsh insofar as start-up founders often dig deep into their own pockets to invest in those companies. They do so at great risk and they also sacrifice a great deal in the process. We would certainly be open to reviewing this down the track, to see whether or not this constraint is liberalised.
It has been pointed out that these start-ups can, through their founders, access the support that comes through the R&D tax offset, for instance. A lot of companies and a lot of start-ups indicate that they are very much in favour of the R&D tax concession system. In some cases, start-ups have said to me that it is the defining point as to whether they will stay in Australia or move overseas. If we have that system in place, that is a good thing. Having said that, while the R&D tax offset is very important, we certainly think that consideration should be given to extending that benefit down the track to start-up founders, who, as I said earlier, sacrifice a great deal and are doing important work for the nations economy. We commit to reviewing this oversight after the bill takes effect.
While overlooking the inclusion of start-up founders and directors in receiving this tax benefit, the bill seeks to improve the targeting and identification of suitable investorsthat is, that they are investing in the right type of company in order to qualify tax incentives. The issue with the current structure is that the bill places the onus of reporting primarily on innovating companies themselves and their reporting to the ATO will help later validate the tax offset claim.
Secondly, while prohibiting founders from accessing the concessions, the bill allows trusts and companies to access the benefits. As I indicated earlier, the opposition and the government both modelled their taxation reforms in this area largely on the system that operates in the United Kingdom. This scheme has seen, as I indicated earlier, new enterprises and jobs created. Unlike the UK scheme, which expressly prevents trusts and companies from accessing similar taxation concessions, the coalition will allow trusts and companies to take advantage of these liberalised arrangements. While the specific arrangements in the bill aim to improve tax benefits to investors who make genuine investment in early stage innovating companies, including trusts and companies, this means that minor innovations or practices that do not represent actual innovationslike a company introducing a new product in Australia that is already being sold elsewherewill not be eligible for tax incentives. While we will not oppose the arrangement allowing trusts and companies to access the tax benefits at the moment, we will leave open the option of reviewing this measure in due course. But we will only make any changes pending the outcome of such review after extensive stakeholder consultations.
Thirdly, under the federal oppositions policies we will not cap the capital gains tax exemption for innovation investors to 10 years, which is what the government proposes in this bill. We take this position because development and commercialisation of ideas takes time. Sometimes start-ups will start on one course with one idea and then pivot to something else, and their development process does take time. That is why our policy will not impose a 10-year cap in the way that the government has. We believe that any capital gains that are immediately directed into new ventures should remain capital gains tax free and that this will help build innovation momentum in this country. Again, we will review the governments legislation in this area in due course.
Finally, Labor note that when the government made the announcement on these types of incentives in the release of its National Innovation and Science Agenda back in early December they did two things. One is that, in the venture capital space, they said that the arrangements announced by this bill would take effect from 7 December, yet on the angel investment side the measures that are being put in place do not take effect until 1 July. As people in the start-up community have pointed out, the unintended consequence of this is that it created an investment hiatus where some potential angel investors would hold off investing in new start-ups or extending angel investment until the new arrangements take effect on 1 July. Some people have dubbed this an investor strike. In late March, we raised our concerns about this. In late March we publicly committed to work with the government on bringing forward the start date of these measures to, at that time, 1 April. The government, frankly, ignored the offer. It is hard to believe that they could see much needed capital being held back from start-ups today in the interests of meeting an artificial, self-imposed start date.
The delay of investment decisions is a real problem and a lot of people have said that it gives them concernthere have been people on public record that have expressed their concern. Some will be very careful about the way that they couch those concerns, because they clearly do not want to be seen as waiting for a tax incentive before making an investment decision, but the reality is just thatthat some investors will wait. Given the low level of angel investment in this country relative to other countriesfor instance, the $21 million I focused on from 2012it is important for us to get this moving much quicker, to raise awareness, get new investors in and have that money flow through.
There are people working to help boost angel investment in this space. I note that that last year, for example, KPMG released a very important guide on educating angel investors on the best way to direct their investment to ensure that enterprises and investors understand the process well, and, through that, to encourage more people to put the money into early-stage innovation in this country. There are people there trying to do the work, yet the government, for reasons best known to itself, decided that it would not bring forward the start date. Even though we extended to them the offer and we made that statement publicly, they did not come back to us to work with us on this.
A lot of people, particularly in the start-up space, laud the bipartisanship of both sides of politics on this. I would say in relation to that that bipartisanship would entail collaboration, active engagement and a preparedness to accept ideas on both sides of the fence. Bipartisanship in the eyes of the coalition is that it makes an announcement and expects us to just support it blindly. That is not bipartisanship. It is basically forcing one side of politics to accept that the other side is completely infallible and that it has got its system right. We have seen the way the government have got that system right on equity crowdfunding! We have worked closelyand I do welcome that there has been a commitment to work closer on that particular billbut again the government makes these announcements and has these things set within the arrangements and then will not accept ideas to work collaboratively to address them.
If you think it is an important policy objective to get more angel investors in, why would you set an arbitrary deadline that will not get more investors in sooner? The government can explain to the start-up community why it believes that it could not have aligned the angel investment start date to the venture capital start date of 7 December. It makes no sense. We will be interested to see in the summing-up report by the government why they did that in that way.
We are certainly happy to support large parts of this legislation. We think it is important to get more money in. We think it is important to encourage angel investors and also those in the venture capital industry who do believe in the inherent talent that exists in this country. We need to see more money go into this space. We do not have a great track record when it comes to venture capital. Compare, for instance, the level of venture capital in this country to the US. Some will say you have to be careful about making these comparisons because of the maturity of the venture capital market in the US, but it gives you a sense of what we have to aim for. Venture capital investment as a percentage of GDP is less than 0.025 per cent. In the US it is greater than 10 times this. Obviously the markets are different and it is not always neat to compare the two but it does give you an indication of the gulf. So we do need to do more.
There is another area where I think we need to do more. In the interim while these arrangements take effect we need to work with other mature venture capital markets to raise awareness of the potential that exists in this country for venture capital. If any trade mission to the US does not include talking with US based venture capital firms to build investment bridges between the two countries, it would be an absolute waste of time for that trade mission. They should ensure we take every single opportunity we can to strengthen investment flows into Australia. There are some funds that are seeking to do this. I note that Signal Ventures, through Niel Robertson and Atlanta Daniel, for example, recently announced a deal that would bring US investors and Australian investors together, not only bringing capital but bringing expertise. These are the types of initiatives that will help in the longer term. We hope, ultimately, to work with the government on these things. It is important for the country and it is important to generate the jobs of the future.