Tue, 14 Oct 2014 - 21:00
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In the Media: Start-ups win on share options

From Technology Spectator, 15/10/14 by Supratim Adhikari http://www.businessspectator.com.au/article/2014/10/15/technology/start-ups-win-share-options

Australia’s start-up scene has just received a welcome dose of wish-fulfilment and after labouring long and hard to get changes made to the tax treatment of employee share options, the Coalition government has finally delivered the goods for tech-focused entrepreneurs.

It's no magic bullet, but it's a healthy step in the right direction, and, at the very least, expunges some of the deterrents set in place by the previous Labor government.

The Coalition government’s Industry Innovation and Competitiveness Agenda, released yesterday, erases the previous rules that imposed an immediate tax liability on employees who were given share options. Instead, employees will now pay their tax when they’re sold, provided the shares are held for at least three years.

The maximum time for tax deferral has been extended from seven to 15 years and the $1,000 upfront tax concession for workers who earn less than $180,000 per annum has been retained.

Now, there are a few strings attached -- companies must have an aggregate turnover of less than $50 million, be unlisted and incorporated for less than 10 years -- but the overall sentiment from the local tech community is that it has been given a fighting chance.

Undoing the mistakes of the past

When it comes to employee share schemes, the Abbott government has really removed barriers for start-ups that should have never existed in the first place.

Undoing the changes ushered in by Labor in 2009 was pretty much a no-brainer for the government, and the positive impact of this will filter down not just to the tech community but to small- and medium-sized businesses in general.

However, the Coalition’s move to overhaul the controversial 457 visa process and tip $12 million into improving the quality of science, technology, engineering and mathematics (STEM) subjects in primary and secondary schools, are perhaps likely to play an even greater role in how Australia’s start-up future takes shape.

Access to skilled labour has been a severe constraint for local tech start-ups and the inability to recruit skilled ICT workers in serious numbers has been as big a burden as the legal and accounting rigmarole associated with the employee share scheme.

The tweaks to the 457 visas (sponsorship approvals extended from 12 to 18 months and relaxing the English language requirements), coupled with the changes to the employee share options, should now allow start-ups to dip into larger talent pools and also hold on to employees for longer.

A push to parity 

Fortunately, the exuberance is tempered with recognition that this is a first step in a long journey, and while the Abbott government should be credited for its effort, the measures announced do little more than put our tech start-ups at level peg with their global counterparts.

That’s a sad indictment for a country that has all the ingredients to lead from the front on technology and innovation, not simply play catch-up.

Industry group StartupAUS board member Dr Jana Matthews says that the growing interest of venture capital players in the local start-up scene is an encouraging sign, but there’s still a large gap between Australia and its peers.

“The reality is that Australia still lags behind other developed nations, including our regional neighbours such as South Korea, Singapore and New Zealand,” Dr Matthews said.

“We welcome any moves by the government to foster investment in startups -- and hope that an effective Entrepreneurs Investment Program grant scheme is next on the government agenda.”

Disrupting the superannuation stream

Setting the agenda at a national level bears careful consideration and is really a lot more than just tweaking a few rules and easing a few restrictions. Disrupting the traditional investment patterns and freeing channels of funding for start-ups is likely to be a far harder endeavour.

How to getting even a small portion of the wealth residing in our $1.7 trillion super industry to trickle into the technology sector, now that’s a challenge that will require some serious thinking and a lot of courage from the government of the day to tackle.

It’s an issue that Scott Farquar, chief executive and co-founder of Australian start-up success story Atlassian, was at pains to point out earlier this week.

Speaking at the KPMG J.J.C. Bradfield lecture in Sydney on Monday, Farquar noted that only 0.0006 per cent of Australia's superannuation pool was invested in start-ups

That 0.0006 per cent pales into insignificance when compared to the United States, which commits around two per cent of pension funds to venture capital as an asset class.

So we have one of the best savings pools in the world and instead putting it into action, Farquar bemoans, Canberra decided to go the other way and made it even harder for superannuation funds to invest in venture capital.

The problem, according to Farquar, is that the new superannuation disclosure laws push for such granularity that investment into a start-up, no matter how miniscule, has become well-nigh impossible.

“(The laws) require every asset to be reported on a ‘look through basis’,” Farquar says.

“What this means is that if a $1 billion superannuation fund invests $10m in a VC, who invests $100,000 in a start-up, the superannuation fund needs to disclose the exact funding details for something that is 1/10,000th of the fund!”

“I’m hugely in favour of better disclosure! But this is madness. It would turn every VC-backed start-up into a quasi-public company,” he adds.

It’s unlikely that the Coalition government, or any other one for that matter, would be inclined to tackle this in a hurry.

But as Paul Fletcher, parliamentary secretary to the Communications Minister and member for Bradfield in NSW, told Fairfax, there’s an opportunity for the creation of a private mid-market investment vehicle for super funds to gain exposure to start-ups.

That’s the sort of conversation that needs to happen with a lot more regularity.

Harnessing the potential of Australian start-ups to start making a concerted impact on productivity and efficiency will also require equipping our corporate sector with the right tool kit. Our captains of industry have a lot to learn from start-ups, but having said that, the real value lies in how effectively the corporate sector can work with entrepreneurs to create an ecosystem that makes our industry players globally competitive.

The Abbott government's action won't solve all the ills plaguing our start-up scene, but it's a start, whether it leads to anything more fruitful remains to be seen.

The relief could yet turn to dismay unless both sides of politics are willing to take a consistent approach to the start-up sector and provide the continuity needed to help our start-ups blossom. This is one area where the need for bipartisanship is paramount -- the market forces are in place, the technology is in place, will our leaders have the resolve?