How Australia is Trying to Gain Innovation Glory

scott morrison speakingIn Australia, we currently have tax incentives for early stage investors. When he was still treasurer, Scott Morrison announced $1.1 billion in tax incentives to encourage early-stage investment in Australian startups.

These measures were called the Tax Incentives for Innovation Bill and have been in effect since 1 July 2016. The Innovation Bill has been designed to help Australian entrepreneurs obtain funding from local investors, and thus help to keep those enterprises on our shores, rather than lose them to other countries, where the startup climate is more friendly, as is the case currently.

Such measures are part of the Government’s plan to move the Australian economy away from the declining mining and resources industry and back towards innovation and science, areas of the economy that have been all but openly ignored by each successive government since the mining boom first erupted in the mid-1980s. To this end, the Tax Incentives and Innovation Bill is just one first step toward its commitment to firming up Australia’s future through innovation.

 

Investing in Aussie ‘innovations’ more lucrative for Australian investors

Under these measures, there’s a 20 percent tax offset on investments in eligible innovation companies, and a 10-year tax exemption on capital gains tax for investments held for a minimum of 12 months. There are also tax cuts for non-sophisticated investors, but with an investment cap of $50,000, while partners in an Early Stage Venture Capital Partnership (ESVCP) will now receive a 10 percent tax offset on their investments and will no longer need to divest their interest in a company when its value exceeds $250 million; the fund size for ESVCPs has also been increased from $100 million to $200 million. Read more details at the ATO website

The key for investors looking to for startups to invest in is in how the startup is defined by the Government. In order to benefit from the Innovation Bill, the startup must:

  • Be incorporated in Australia during the last three years
  • Have an assessable income of $200,000 or under and maximum expenditure of $1 million in the prior income year
  • Not be listed on any stock exchange
  • Meet the ‘innovation’ test.

 

That last point, regarding the innovation test, that’s the big one of any startup looking for investors. In order to qualify, the business must meet a set criteria to be determined as ‘innovative’. Although the ‘innovation’ test is currently undefined, an early policy discussion paper outlined that, as a bare minimum, an eligible company would need to:

  • Have a new or significantly improve on an existing idea
  • The ability to generate value from the idea
  • Be able to pursue global markets
  • Have a suitable management team capable of high growth
  • Meet a minimum number of gateway and safe habour tests.

 

While the ‘innovation’ test is still yet to be determined, the government has also made it easier for startups and small businesses to access crowd-sourced equity funding, which has become a popular way for many overseas businesses to fund their ventures, but up to this point, has been unfavourable for Australian businesses. But all that’s about to change.

 

It will soon be easier to access crowd-sourced equity funding

To further complement the Innovation Bill, the government has also introduced to Parliament legislation to implement crowd-sourced equity funding (CSEF) laws that will provide an even more diverse range of funding options for businesses by removing the competitive disadvantage most Australian businesses are at compared with their overseas counterparts.

CSEF is a way for start-ups and small and medium-sized companies to raise money from the public to finance their business. Companies typically raise small amounts from a large number of investors. Each investor can invest up to $10,000 a year in a company and in exchange they’ll receive securities in the form of shares.

Similar CSEF schemes are available to business all over the world, most notably the US, but similar schemes have also been introduced into the UK and New Zealand. The launch of a similar scheme in New Zealand, saw more than 20 innovative companies raise a combined $12 million in funds, within 12 months of the scheme being introduced. The goal is to achieve similar or better here. 

From September last year, businesses have been able to use crowd-sourced funding to invest up to $10,000 per year in small and medium companies to help them begin or grow their business, or pay off existing debts. For more information, visit the ASIC website.

 

Innovation is vital for Australia’s continued prosperity

The Innovation Bill and the Crowd-Sourced Equity Funding Scheme have been fairly significant steps in an aim to sure-up Australia’s economic future, which for too long has relied on the export of our natural resources.

As Australia continues to move away from exporting and manufacturing, it’s vital that Australians are given other opportunities to invest in areas that will propel the Australian economy forward, either as the founder of an ‘innovative’ enterprise or an investor in one, which, up to this point, there has been little incentive for any individual to be inclined to do so.

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Australians should see this as a call to arms: If you have an innovative idea, now is the time to act on it. Start your own business and propel it forward by accessing funds by the traditional angel-investor route, or by crowd-sourcing it. Like any good idea, though, in order to make it a reality, you must have a solid plan of attack, in order to ensure it moves forward.

 

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