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In the Media: Tech entrepreneurs see future value in new industry policy

From the Australian Financial Review, 15/10/14 by Paul Smith http://www.afr.com/p/technology/tech_entrepreneurs_see_future_value_CqQtuXq3uWjOV4eBh6TIjN

Australian technology entrepreneurs have said changes to the tax treatment of employee share options, greater investment in science skills and loosening of restrictions on using workers imported on 457 skilled migrant visas, would help level the playing field for startups trying to compete on the global stage.

As part of the government’s “Industry Innovation and Competitiveness Agenda,” released on Tuesday afternoon, previous rules that meant equity issued to employees was taxed at the point of issue, rather than when the options are exercised have been removed. Instead businesses with a turnover of less than $50 million will be able to provide employee share options at a small discount that will not be subject to up-front tax, as long as the employee holds the shares or options for at least three years.

In addition the maximum time for tax deferral has been extended from seven to 15 years, in a move the government said would give startups more time to be competitive and succeed.

Meanwhile following a review of the 457 Visa program, sponsorship approvals will extend from 12 to 18 months for startups, and English language requirements will become more flexible with a new caveat that standards need only be appropriate for the industries and occupations being sought.

As a further move, aimed at increasing the potential pool of investors in local businesses, the significant investor visa (SIV) class will be expanded to encourage more high net worth individuals to move to Australia.

Currently these visas are available for applicants having an eligible investment in Australia of $5 million, for a minimum of four years. Under the plans announced on Tuesday this will be extended to add a new Premium Investor Visa (PIV), offering a more expeditious, 12 month pathway to permanent residency than the SIV, for those meeting a $15 million threshold.

SKILLS ADDRESSED

In a further pillar of the new industry policy the government said it will invest $12 million to improve the focus on science, technology, engineering and mathematics (STEM) subjects in primary and secondary schools across the country.

Co-founder of online retailer Shoes of Prey Jodie Fox said the changes to ESOP rules were a positive move towards alleviating the legislative hurdles put in the way of early stage Australian businesses. She said the move to address educational short-falls in STEM, offered hopes that local startups would eventually not have to fight over scraps when it came to suitably skilled tech staff.

“Australia’s start up scene is teeming with enthusiasm but handicapped by regulatory frameworks. Relieving some of the tax issues around a key point of leverage for new businesses is a big step towards a flourishing ideas economy,” Ms Fox said.

“Improvement in the STEM disciplines along with the alleviating taxation on Employee Shares helps to address both sides of the issue. Firstly, growing technology talent here, and incentivising them to stay.”

The changes to ESOP rules have come too late to save founder of social networking intelligence company Local Measure Jonathan Barouch from spending a high price to establish share schemes under the old regime. However he said the changes had needed to be made for a long time.

He said Local Measure had set up an employee share scheme two years ago, but the system had been so complicated that it had cost $20,000 to get going.

REDUCING COSTS

“In the US, it is possible to buy an off-the-shelf share scheme and have it set up and in place for about $1000. That’s a very big difference when compared to Australia. The changes will level the playing field,” Mr Barouch said.

“The reality is that in Australia we are fighting for global talent. Employee share schemes are an important form of incentive for tiny companies that can’t afford to compete with the large upfront salary packages of multinationals, or more established companies with deeper pockets.”

He said short term cost savings from the new scheme would be very welcome, but he was more enthused by the longer term prospect that more talented youngsters will be encouraged to work for innovative startup companies.

“This impact should not be under-estimated. Some of the talented kids who might instead have gone to work for one of the big consulting firms - or left Australia altogether for Silicon Valley - may now be tempted to stay,” he said. “The changes will make a huge difference among the grassroots of the start-up sector.”

Aside from the 457 Visa changes introduced, Mr Barouch said he had also been hoping for a visa class specifically aimed at entrepreneurs, which he believed would help attract budding innovators, who would rather move to Australia than Singapore or across to the UK.

Co-founder of tech-focused venture capital firm BlackBird Ventures Rick Baker said employee share schemes had become one of Silicon Valley’s core tools for creating hugely valuable businesses. He said he was currently working with startup that was struggling to hire two top people due to its inability to provide a simple employee option plan that didn’t punish the employees with upfront tax.

“Denying Australian startups this tool makes it harder to convince the best people to join our startups and is one of the factors for moving our best businesses offshore. Most of all it denies us the opportunity to spread rewards for success to a wider group of those responsible for it,” Mr Baker said.

“Creating a viable ESOP system for Australia will in fact increase long term tax revenue, as it will foster innovation.”

PREVIOUS FRUSTRATION

Not-for-profit industry group StartupAUS said the new policy package represented a first step towards correcting market failures that had created unnecessary barriers to high growth new ventures.

It said the policy came at a critical time for Australia – with world-changing technologies and digital disruption presenting a huge opportunity to diversify the national economy, and move away from one based on resources, primary industries and domestic focused business to one based on high-growth knowledge-intensive businesses.

Google Australia’s director of engineering and StartupAUS board member Alan Noble said he was encouraged by the recognition that tech-savvy and technically educated workforce as essential to Australia’s future.

“Capitalising on the digital economy will only be possible if we have people with the ICT skills necessary to develop products that can compete globally,” Mr Noble said.

“As studies show the best way of increasing participation in computer science is to start young, and we hope that the focus on STEM subjects is brought forward to it’s logical conclusion – which is to have skills like computational thinking and coding being introduced at primary school level”

Speaking at the Bradfield lecture in Sydney on Monday night, co-founder of high profile Australian tech success story Atlassian Scott Farquhar said the previous share option policy had forced workers overseas.

He said Atlassian had recognised the vital importance of having share-incentivised staff at a startup and had been giving employees options from the start. However he said, due to the system in place, this had cost the company $5.4 million in tax.

“We made it a priority and were lucky that we could afford it, but many other companies are not in the same fortunate situation we were in,” Farquhar said. “It is another disincentive to stay in Australia if you have a tech sector start-up.”

Mr Farquhar also pointed to a shorfall in Australian education as a major headwind on the local tech sector. He said enrolments in tertiary computer science were falling, at the same time as demand for technologically literate workers skyrocketing.

“This lack of university interest probably starts at the school level, where there no uniform national requirement to teach computer and software skills,” he said.