Published 13 May 2015 15:16, Updated 14 May 2015 14:56
Caitlin Fitzsimmons and Michael Bailey
Independent Senator Jacqui Lambie asks Treasurer Joe Hockey for a selfie on Wednesday 13 May. Photo: Alex Ellinghausen.
The 2015 Federal Budget is a mixed bag for start-up entrepreneurs. The signature tax cut for small business won’t help the majority of high-growth enterprises and there was not much policy targeted specifically at the start-up sector. However, the government did deliver much-needed reform on issues such as employee share options and equity crowdfunding.
Many entrepreneurs have criticised the Budget for not making a clear distinction between small business and start-ups, and instead trying to create generic policies to cover both. Organisations such as StartupAUS define start-ups are high-growth entities with huge potential to scale internationally, as opposed to small businesses that are more localised with steady returns.
“The Australian government seems to misunderstand the distinction between small business and start-ups,” says Nitro founder Sam Chandler.
“While these proposed changes are great for small business, the package will have little impact on start-ups and little impact on job creation, economic growth and Australia’s position on the global stage.
“Small business is important to the status quo but start-ups are important to our future.”
Indeed, the “Encouraging start-ups and entrepreneurship” overview page on the Budget 2015 site uses the terms “start-up” and “small business interchangeably. “Our nation proudly has a larger proportion of the population starting a small business than almost any other developed country in the world,” the overview says. “In 2013-14, there were over 280,000 new small businesses in Australia. This package provides a helping hand to start-ups and will help energise enterprise across the country.”
Here are the five main ways that the 2015 Budget affects entrepreneurs.
1. The small business tax cuts won’t really help start-ups
The 2015 Budget includes a big sweetener for small business, with a reduction in the company tax rate of 1.5 percentage points for businesses with turnover under $2 million. However, this is not helpful to start-ups. Most start-ups with turnover under $2 million are not yet profitable. Indeed, many high-growth technology companies with far higher revenues are not yet profitable either - companies like Xero are reinvesting all their revenue in growth. If you’re not profitable, then a tax cut is a moot point.
“The 1.5 per cent reduction in the corporate tax rate for small business will not have a huge impact on most tech start-ups in Australia,” says StartupAUS board member Peter Bradd. “These are generally high-growth businesses that are more likely to be investing their revenues in growth and seeking funding for expansion than counting the percentage points on their tax bill. If job creation and economic development are the goal, the $1.5 billion earmarked for this scheme could be far more effectively used - for example by supporting the eco-system that produces high-growth tech businesses.”
2. The tax write-offs are somewhat useful
From now until the end of June 2017, all small businesses will be able to get an immediate tax deduction for any individual assets that cost less than $20,000 apiece. Assets worth more than $20,000 each can be pooled together and depreciated at the same rate.
New businesses will also be able to immediately deduct professional expenses incurred as start-up costs, such as legal fees to start a company, trust or partnership. Previously the cost was written off over five years. The business registration process will be streamlined as well.
3. Employee share schemes are better but not perfect
Entrepreneurs have been lobbying for a change to the taxation system for employee share options, reversing changes that the previous Labor government made in 2009. The reforms were widely expected last year but did not transpire in the 2014 “austerity Budget”. Now the time has finally come. The new law means that staff in all companies will not pay tax on shares and options until they’re actually worth something. Eligible start-ups will also be able to offer shares and options to employees at a discount, with the tax deferred until sale (for options) and no tax on the discount (for shares).
Morgan Ranieri, co-founder of YourGrocer, says he is excited about the changes to employee share options. “As a start-up, we’d prefer that our team has equity in the company so that they think of the company as their own,” Ranieri says. “Team members with equity think more like business owners than employees, which is exactly what we want.”
However, the devil is in the detail of what exactly are “eligible start-ups” and the other restrictions buried in the policy, as BRW has reported previously. BlueChilli growth hacker Alan Jones says the reforms will create two classes of worker at a start-up.
“You’ll have those monied workers who could access the options and they’ll have skin in the game,” Jones says. “Then you’ll have those who joined after the company was too old or grew too big - they’ll just be turning up earning a salary. That’s going to be difficult to manage culturally and shouldn’t be how an employee share scheme works.
“The other problem is that the limits on how what proportion of the company a single employee can own effectively exempts founders from this. It won’t make finding and attracting a good technical co-founder any easier.”
4. Cutting red tape is a real thing, not just a catch phrase
The government has promised to cut red tape and streamline new business registrations. Blue Chilli’s Jones says the ability to change your legal structure without incurring capital gains tax is probably the most useful Budget reform for start-ups.
“It’s very common to start as a partnership and then move to a ‘Pty Ltd’ structure when it’s time to bring shareholders in,” Jones says. “It’s also common to set up, say, a Delaware C-corp in the US and then transfer intellectual property and assets over to that. So there can be quite a bit of juggling of company structures and when you’re a start-up that can get very expensive.”
5. Start-ups will be able to access equity from the crowd, but VC money will remain scarce
The government has committed to enable equity crowdfunding (also called crowd-sourced equity funding). Currently this is restricted to wholesale investors who qualify with a minimum net worth or income, or else business are restricted to raising less than $2 million from fewer than 20 investors. The government says the new law will remove the costly elements of transitioning to a public company, enabling an entrepreneur to more easily raise funds from a large number of small investors. The new law will strive to balance supporting investment, reducing compliance costs for small businesses and maintaining an appropriate level of investor protection.
The Budget allocates $7.8 million in funding over four years from 2015-16 to enable the Australian Securities and Investment Commission to implement a new framework. “Equity crowdfunding reform in Australia will significantly assist in the funding landscape across Australia, and help drive the Australian economy,” says CrowdfundUP founder Jack Quigley. “Increased focus on stimulating the economy via such investments will drive the future growth of the digital finance industry in Australia.”
On the other hand, Blue Chilli’s Jones says he would prefer to see more focus on encouraging venture capital and angel investment. “Why not take a bit out of the diesel fuel rebate and bring in a copy of the UK’s SEID program, where early stage investors in tech start-ups can get an immediate 30 per cent write-off on their investment up to £1 million?” Jones says. “Broadening equity crowdfunding is okay but that’s just an alternative to betting on the Melbourne Cup, the chunks are too small to be meaningful.”
6. The grants for start-ups are being cut again
Last year, the government scrapped the highly regarded Commercialisation Australia program and the Innovation Investment Fund, saving nearly $170 million a year.
The Entrepreneurs’ Infrastructure Program remained but it has now had its funding cut by $27.3 million over five years. StartupAUS points out there was no commitment in Budget 2015 to give the accelerating commercialisation stream of the EIP a greater focus on tech startups, nor any new initiative to stimulate greater levels of angel or venture capital investment.
In contrast, StartupAUS says China recently announced the creation of an $8.3 billion seed-stage National Venture Capital Fund, and many other countries including the UK, Singapore, Israel and New Zealand continue to deliver funding programs specifically aimed at stimulating greater levels of private investment in start-ups.
7. There’s no new support for STEM education
High-growth technology companies struggle to find enough skilled staff and entrepreneurs want Australia to produce more graduates in science, technology, engineering and mathematics (STEM) disciplines and more people with programming skills.
“Australia still doesn’t have a Stanford or an MIT, and the Budget does nothing about that,” Blue Chilli’s Jones says. “We’re still graduating far too few people across the STEM subjects.”
StartupAUS says the Budget offers no indication that the government recognises this looming skills shortage or has any plans to address it.
“If Australia is to remain ‘the Lucky Country’, we need to evolve, and shift from programs focused on extraction to commercialising innovation and growing companies,” says StartupAUS board member Jana Matthews. “We’re pleased that the government have recognised that the future of the economy rests on the new companies that are starting up now. What is missing is an overall strategy for the government to develop the vital sector called the technology sector.
“In order to do that we need to give people the skills and knowledge they need, both in STEM subjects so that they can build tech start-ups, and also entrepreneurship so they can turn those start-ups into high-growth businesses that will create jobs.”
Local Measure co-founder Jonathan Barouch says the pipeline of skills needs to start early, with schools encouraging study of STEM subjects.
8. Sponsoring visas for skilled workers might become easier
In the mean time, start-ups need access to skills now, and Local Measure’s Barouch says the 457 visa process should be made easier for companies to import highly technical skills.
The Budget provides $3.7 million over four years to implement recommendations from an independent review of the 457 program. This measure will provide funding for the simplification and streamlining of visa processing for low-risk 457 sponsors, and the investigation of 457 sponsors to determine whether they are complying with their sponsorship obligations.
9. Childcare is a winner but businesses face penalties for paid parental leave
The Budget provides an extra $3.5 billion funding for childcare, though it does not increase availability. Ali Moini, the managing director and founder of beauty clinic chain The Skin Boutique, says affordable and available childcare is an essential business issue. While The Skin Boutique is still small, his previous beauty therapy chain was bigger and the majority of the 150 employees were women of childbearing age.
Although his business offered part-time work and flexible hours, Moini found that the majority of women did not return to work after having a baby, frequently citing the high-cost of childcare as the main reason.
However, companies that seek to attract high-quality staff by offering paid parental leave schemes that are more generous than the government minimum will be penalised. The government won’t allow a new parent to access both the government and corporate paid parental leave, so companies can either ditch their schemes or pay an extra $11,539 per person to replace the government income. Corporate lawyer Brett Feltham of DLA Piper says many companies will opt for the former or find alternative incentives for staff. The budget lists this measure as saving $1 billion over four years but if Feltham is right, this is far too optimistic.
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