The price of entrepreneurship: Australia’s inequitable tax policy is leaving founders at a disadvantage

The recent Startup Genome Ecosystem Report saw Sydney and Melbourne fall in global rankings of best cities for startups, highlighting Australia’s lack of focus on innovation, technology and startups at a national level in recent years.

Little has been done to address the community’s concerns over these issues, so the results of the report are somewhat unsurprising.

Considering startups and small businesses are the backbone of growth in our economy, having the right policies in place that motivate entrepreneurs to excel and grow their businesses is critical. The government needs to act decisively on innovation policy.

If not, we risk losing our nation’s entrepreneurial spirit, stifling innovation and driving ambitious founders and businesses to economies that are more supportive.

Entrepreneurship’s price tag

One of the biggest downfalls for Aussie entrepreneurship is the significant taxes that exiting founders incur. Aussie startup founders face the same capital gains tax (CGT) as a passive investor if they go on to sell their business down the line. However, unlike real estate or other investments, which tend to be passive, startups are massive contributors to our economy and require an active role from founders. They provide enormous employment opportunities, encourage spending, and contribute significantly to GDP.

In fact, PwC estimates Australian startups have the potential to contribute $109 billion (4% of GDP) to our economy and generate 540,000 jobs by 2033. So to treat founders of companies in the same (or in certain cases, a worse) manner as an ordinary investor doesn’t incentivise intelligent contributors to start their own venture.

When you consider the schemes available to investors, such as ESIC, which provides early-stage investors capital gains exemptions and tax offsets, it clearly outdoes incentives for founders.

What this implies is, if you already have money and are funding an ESIC, you will be rewarded.

However, if you’re the one founding and building the business from nothing, or even an earlier investor or option holder, you won’t be offered the same incentives as an investor in the same business.

In theory, amongst other things, a good tax system should be seen to be equitable. At the moment, Australia is clearly lacking in equity when it comes to CGT for founders.

When you look abroad, we are not even close to being competitive.

Incentives in the UK, such as Entrepreneurs’ Relief, for example, reduce the amount of CGT paid on business assets to 10%.

In Australia, net capital gains are treated as taxable income in the tax year in which an asset is sold or otherwise disposed of. Although Australia has minor concessions for small business and holding an asset for more than one year, they aren’t competitive.

When investors can be completely exempt from CGT in an ESIC in Australia and the founders are not, the disparity is quite clear.

Knowledge, technology and innovation are fast becoming the primary exports of strong economies. The last thing we should be doing as a nation is disincentivising the people who are the driving force behind building these exports.

If more isn’t done to incentivise Aussie founders and support innovation, we run the risk of slipping further down global standards and ultimately drive ambitious founders offshore.

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