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Budget 2015: Big wins for small businesses. Small wins for startups.

Budget 2015: Big wins for small businesses. Small wins for startups.

The Australian government is a business in serious debt; and it’s affecting the nation. Customers (citizens) are complaining that the government’s products are failing the tests of quality and innovation; and these ‘substandard’ products are costing customers more than they want to pay (via tax). If a private company was in serious debt and leaving customers unsatisfied and migrating to newer alternatives, the CEO would be fired. As we’ve seen over the past few years, even government parties are unhappy with their leaders. Due to the failure of last year’s budget, and strong expressions of public disapproval, the Australian government has smartly chosen to revise its plans. Treasurer Joe Hockey took to the podium yesterday to deliver the details of the new budget, which focuses on small businesses, a welcome change.

The government spent an estimated $420.33 billion in the 2014/15 financial year, whereas revenue generated in this period is estimated to be $377.31 billion, according to the ABC. Although this points to a deficit of over $43 billion, Mr Hockey said that by the end of the current financial year this number will beat market expectations and come in lower than $41 billion. Again, according to ABC estimates, in the 2015/16 financial year, the government expects to spend $434.47 billion and raise $397.98 billion – pointing to a deficit of over $36 billion. The government on the other hand believes the deficit will reduce to $35.1 billion in the upcoming financial year, then $28.5 billion in 2016/17, $6.9 billion in 2018/19 and return to surplus in 2019/10, which is more than four years away.

Although the government made no attempts to admit to its failings – namely, the former budget – it deserves merit for recognising the important role small businesses play in Australia’s economy. According to the government, 96 percent of all Australia’s businesses are small businesses, employing over 4.5 million people and producing over $330 billion of our nation’s economic output per year. The new budget indicates that the government is relying heavily on small businesses – there are over 2 million in Australia – to safeguard the nation’s economic prosperity.

DECREASING TAXES TO INCREASE CREATION OF JOBS

Some of the greatest benefits to small businesses and startups – the latter was mentioned twice in Mr Hockey’s speech yesterday – are the changes in tax laws. As part of the government’s $5.5 billion Growing Jobs and Small Business package, small businesses, with an annual turnover of less than $2 million, will get an immediate 100 percent tax write-off for expenses up to $20,000, rather than writing them off over five years. The $20,000 limit applies to each individual item – whether it’s legal services or technology. Previously the threshold was $1,000. This is intended to reduce the cost of starting up and running a small business or startup in the country. 

However, it’s unlikely that this tax change will have a significant impact on startups specifically. Building innovative technology and bringing new technology products to market is costly. Startups raise hundreds of thousands of dollars to fund development prior to commercialisation. Getting instant write-offs for items or services worth up to $20,000 is small in comparison, though not completely useless.  

It’s worth noting that the Australian small business community will need to remain honest about its expenses and not manipulate the system, if we are to return to surplus. Mark Chapman, Tax Communications Director at H&R Block, said small businesses should not let the generosity of the tax break override their commercial instincts.

“This tax break is ideal for those businesses which were planning to purchase assets anyway or have a real business need to invest. But remember, there’s no such thing as free money. You have to spend a dollar to get 30c back (or 28.5c after 1 July) so make sure those capital purchases fit with your overall business plan,” said Chapman.

“If you’re not sure whether now is the time to make a purchase or indeed whether to make a purchase at all, have a chat to your accountant who will be able to quantify the advantages and disadvantages for you.”

From July 1 this year, small businesses will also have their tax rate cut by 1.5 percent – from 30 percent to 28.5 percent – which is the lowest small business tax rate in almost 50 years. Unincorporated businesses will receive a 5 percent tax discount of up to $1,000 a year.

As of April 1, 2016 small businesses and startups that supply their employees with portable devices like laptops and tablets will no longer be required to pay Fringe Benefits Tax. Previously, businesses were unable to obtain a Fringe Benefits Tax exemption because laptops and tablets were considered to have “substantially identical functions”.

Budding entrepreneurs will be able to register new businesses through one streamlined site, while business owners will also be able to change the legal structure of their businesses without incurring a capital gains tax liability.

Yesterday, Mr Hockey stated: “We are the only government that will deliver tax cuts for small business because we want small business to grow and employ more Australians. But we recognise that small business, in order to succeed, needs better cash flow and better tools for innovation as well.”

Steve Shepherd, Employment Market Analyst at Randstad, praised the government for placing an emphasis on the creation of jobs in Australia, saying it would help bring skilled workers back into the workforce. However, he also warns that job creation will have to keep up to pace with the influx of new workers entering the workforce.

It’s likely that parents will be returning to the workforce sooner as new parents with workplace maternity leave schemes will no longer be able to access the government’s policy. Under previous arrangements, new parents were able to access 18 weeks of leave at the minimum wage on top of any private leave they had. The Government said this policy of ‘double dipping’ will no longer be tolerated, and the changes will net approximately $1 billion.

The government also said it would invest more than $7 billion on childcare to ensure childcare is “more affordable, accessible and flexible” – another way to encourage new parents to return to work sooner.

“Whilst the 2015 budget is generally positive for jobs there are also some challenges it is likely to present and expected to cause the short term unemployment rate to rise. In the last 12 months, we have seen increases in the Workforce Participation Rate causing a rise in the unemployment rate, due to the slower growth in new jobs. With the changes to childcare likely to stimulate more skilled workers to return to the workforce, unemployment is likely to rise if new job vacancies do not outpace rises in the participation rate,” said Shepherd.

“When you see this combined with the forecast budgeted job cuts in the public sector and the bleed of jobs we are still seeing in the resources sector, it is highly likely we will see our unemployment rate rise above the predicted 6.5 percent in the short to medium term. A lot will hinge on SMEs starting to spend money and hire new employees.”

EQUITY CROWDFUNDING OPENING UP TO RETAIL INVESTORS

The government also announced it will be removing obstacles to crowdsourced equity funding (CSEF). The government will invest $7.8 million over four years from 2015/16 to enable ASIC to implement and monitor a framework to facilitate crowdsourced equity funding, including simplified reporting and disclosure requirements. The new law will balance supporting investment, reduce compliance costs for small businesses and maintain an appropriate level of investor protection.

In an article for Startup Daily last year, Chris Gilbert of Equitise explained that Australian startups couldn’t access CSEF due to regulatory barriers faced by intermediaries, including limitations around the involvement of ‘unsophisticated’ investors, classifications of public companies, and the marketing of private placement deals.

A report submitted to the Federal Government by the Corporations and Market Advisory Committee (CMAC) last year supported the implementation of CSEF, outlining benefits to key stakeholders, defined as underfunded small to medium sized enterprises, and retail and sophisticated investors seeking greater diversification in their portfolios. CMAC’s report recommended caps on the amount retail investors were able to invest, restrictions on the amount of advertising businesses could do, and also recommended that CSEF platforms must provide risk disclosure statements.

The changes to CSEF, which will come into effect in the next financial year, are wins for equity crowdfunding platforms like Equitise, VentureCrowd and CrowdfundUP. Currently, wholesale investors with more than $2.5 million in investable assets or annual earnings of $250,000, are able to able invest via crowdsourced equity funding platforms.

Jeremy Colless, CEO of VentureCrowd, welcomed the changes, saying that allowing retail investors to gain equity in startups through crowdfunding “has the potential to massively boost private sector funding for Australian innovation”.

Jack Quigley, Founder of CrowdfundUP, a real-estate focused equity crowdfunding platform, communicated a similar sentiment, saying, “Equity crowdfunding reform in Australia will significantly assist in the funding landscape across Australia, and help drive the Australian economy.”

Wyatt Roy MP told Startup Daily previously that Australia has a risk-averse investment culture, as evidenced by our willingness to spend $200 million on the Melbourne Cup, but half that on startups. An additional funding pool – CSEF – that allows almost anyone to become an angel investor by investing as little as $1,000 could mark a change in attitudes.

“It’s great to see the federal government allowing all Australians to invest in high-growth innovative Australian companies with the announcement of equity-based crowdfunding. We will wait to see the details before VentureCrowd opens the platform to these investors but, provided government policy isn’t too restrictive or prescriptive, we support the move,” said Colless.

“VentureCrowd has already proved the model works, with investments in ingogo, Fame & Partners, and Crowd Mobile.”

EMPLOYEE SHARE OPTIONS NO LONGER TAXABLE UPFRONT

As the government has teased for some time, employee share options will no longer be taxable upfront as of July 1. This is a win for startups that often trade equity to employees as a non-cash incentive to compensate for lower salaries and high-intensity work environments.

Offering company shares to employees became an unfeasible option in 2009 when Labor introduced stringent tax laws to stop high-income executives (earning over $180,000 per annum) from minimising their tax. Inadvertently, these laws discouraged startups from providing employee share options to employees due to hefty upfront tax bills on shares.

The Liberal government announced last year that it would revoke Labor’s rules that required employees to face immediate tax costs on share options they receive from employers. According to budget papers, the new law is a $200 million investment in Australia’s future.

Mr Hockey stated yesterday: “We are expanding the tax concessions for Employee Share Schemes, to make it easier for small startup companies to attract the skills and talent they need to grow. Unlike the old system, under the old government, employees won’t have to pay tax on their shares until they actually receive a financial benefit from those shares. This is great for workers and it is great for innovative startups.”

Earlier this year, Freelancer founder Matt Barrie dissected the policies around the new employee share option scheme and found a number of problems. He told BRW that instead of charging upfront tax, the government is “doubling the tax rate by charging income tax when the options vest”.

“It will [help early-stage startups] but that’s not where the bulk of the employment is – it’s when you can hire 200 or 300 staff that it really matters,” Barrie told BRW. “If you need to bring in a vice president or someone who’s really going to make a difference to the company, you just can’t compete with Silicon Valley if they’re going to get such a big tax bill.”

The new budget says incomes will rise by 2.5 percent in 2015-16, the same as in the current financial year. Incomes are not expected to rise above 3 percent until we’re in surplus – around 2018/19 if all goes to plan. However, tax receipts from individual taxpayers are expected to increase more than 7 percent over the next four years. By 2018/19, individual tax payments will reach $234 billion – 33 percent higher than in 2014/15. This is because workers will be trapped in higher tax brackets as their incomes increase.

“Taxes … are expected to increase by almost 2 percent of GDP over the next four years and when you ask what’s driving that increase, the answer is by and large it’s the increase in personal income taxes and what drives that, the answer is, most of it is about bracket creep,” Grattan Institute chief executive John Daley told the ABC.

According to Deloitte Access Economics, there are 1.3 million taxpayers in Australia earning between $30,000 and $37,000. These taxpayers face the prospect of their marginal income tax rate rising by 14 percent. A further 800,000 taxpayers, with incomes between $70,000 and $80,000, may be required to pay an extra four percent.

Under the current budget, personal income tax won’t be decreasing before 2020/21. Chris Richardson from Deloitte Access Economics told the ABC that the bracket creep was an unfair way to fix the budget.

STARTUPS CAN’T HAVE EVERYTHING JUST YET

While responses to the new budget has generally been positive, some members of the startup community have pointed out its shortcomings.

“Australia urgently needs to develop a strategy for an ‘Economy 2.0′ that can sustain our way of life beyond the resources boom. There is little in this budget to suggest that the government has grasped the importance of investing in the tech sector, despite evidence from around the world that high-growth tech startups are a massive driver of economic growth,” said Colin Kinner, author of the StartupAUS Crossroads report.

StartupAUS, a non-for-profit body representing Australia’s tech startup community, said the budget fails in many respects. Firstly, it doesn’t uniquely target startups; rather, it places them in the category of ‘small business’. The problem with this approach is that it doesn’t acknowledge the unique challenges that startups face.

Although most startups are small businesses, but most small businesses aren’t startups. This is because most small businesses are service businesses – restaurants, electricians, plumbers etc. This is not to say that small businesses aren’t tech-savvy. As Alan Noble, StartupAUS director and Engineering Director, Google Australia, pointed out last year, “[W]hile small businesses often utilise innovations, they typically do not create disruptive innovations of their own, and certainly not “new to world” truly differentiated innovations.”

It’s true that all businesses want (and need) to grow, but small businesses aren’t designed to grow at the speed of startups. In fact, small businesses cannot handle high-growth. If 500 customers walked into a cafe, the business would crash. Whereas, if a startup had 1 million users all signed in at once, with a good server, it can handle it. Due to the inherent nature of technology, tech startups can handle the growth that small businesses can’t.

This is one of the reasons why startups have different pain points to small businesses, and cannot be put into the same category if we really want this sector to flourish.

“Startups are very different to small businesses. Startups are emerging high-growth technology-based businesses that are tackling global markets and have the capacity for massive and sustained growth, enabling them to become significant global businesses within a short period of time. Worldwide startups have been shown to be a major source of job creation and economic growth,” StartupAUS stated in its response to the new budget.

StartupAUS seems to believe that small businesses “are generally not a major source of economic growth or job creation” even though they “provide an income to a significant proportion of the workforce”.  At first glance, this statement seems to contradict numbers mentioned earlier. If 96 percent of all Australia’s businesses are small businesses, employing over 4.5 million people and producing over $330 billion of our nation’s economic output per year, then how is it that small businesses are generally not a major source of economic growth or job creation? What we need to take into account is that Australian startups fall into the category of ‘small business’. Although most startups shut down, the ones that achieve longevity, have the potential to grow our economy faster than small businesses.

It’s true that most startups won’t make it to their tenth year, but when they do, they create new markets, increased competition and they attract valuable partnerships. By creating innovative products, they transform industries or build new industries, and safeguard the nation’s economic prosperity. Not only do they create new jobs, they introduce new career paths.

Responding to the new budget, StartupAUS said, “Australia urgently needs a national innovation and entrepreneurship strategy, and a central agency to drive the innovation agenda. The lack of policy co-ordination and funding for implementation reduces the effectiveness of existing government programs, while decision making regarding regulations and support for startups is falling through the cracks as a result of there being no single portfolio with responsibility for innovation and startups.”

“The recent announcement of plans to reduce red tape and lower costs of business formation is positive for small businesses, but of limited relevance to tech startups, which are still lacking many of the basic support programs available to startups in other countries.”

The same sentiment was communicated by Wyatt Roy MP, who told Startup Daily previously that there needs to be a ‘whole of government approach’ to support startups, because at the moment, policies that affect startups are scattered across different government departments.

“There are visa and immigration issues, issues in foreign affairs, issues in treasury and finance, there are issues in industry. These are all different government portfolios. I think we need a ‘whole of’ government approach. In Israel, it’s done through the Chief Scientist,” said Roy in an interview earlier this year.

Although the government implemented tax cuts that will help small businesses and startups have more cash in their pockets, as well as changes to CSEF that will allow a more diverse range of investors to invest in startups, Peter Bradd, StartupAUS board member, is underwhelmed by the new budget, saying it doesn’t contain the big wins startups in Australia need.

“As the Treasurer himself said ‘People ask me where are the future jobs going to come from’. We know that high-growth businesses create the vast majority new jobs. In the United States, research from the Kauffman Foundation shows that the fast growing 4 percent of companies there create 70 percent of the new jobs. Research in the United Kingdom has seen similar findings of 1 percent of companies creating over 68 percent of new jobs, and the conservative government has implemented the Future Fifty Program to encourage more growth-stage digital businesses,” said Bradd.

“It is widely accepted that tech startups are amongst the fastest growth companies. The demonstrates that the Government is grasping the problem of moving away from an extractive economy to a knowledge driven one, with services and small business prioritised. However, we need to put tech startups on the top of the agenda if Australia is to safeguard its economic future.”

One of StartupAUS’ concerns is that the new budget shows ‘no investment in improving the funding climate for Australian startups’.

“In Budget 2014, the Government announced a “saving of $845.6 million over five years” by scrapping Commercialisation Australia and the Innovation Investment Fund, a reduction of support of nearly $170 million a year. The Entrepreneurs’ Infrastructure Program (EIP) is now the government’s only substantive program remaining to support tech startups, and this year was the subject of funding cuts totalling $27.3 million over five years,” StartupAUS stated.

“There was no commitment in budget 2015 to give the accelerating commercialisation stream of the EIP a greater focus on tech startups. Nor was there any new initiative to stimulate greater levels of angel or venture capital investment.

“In contrast, China recently announced the creation of an A$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 startups.”

Another concern for StartupAUS is the lack of investment in STEM (Science, Technology, Engineering and Math) education that will equip young Australians to build the businesses of the future. While Australians are fairly quick to adopt new technologies, research suggests that pursuing a career in computer science is not a popular option among young people – with computer science graduates dropping in half over the past 10 years. Apparently, Australia is near the bottom of the OECD in creating STEM graduates.

Last year, the government announced that $12 million will be invested to improve science, technology, engineering and mathematics (STEM) subjects in primary and secondary schools. But this commitment seems to have been left out in the new budget.

Noble stated last year that “ 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.”

“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 its logical conclusion – which is to have skills like computational thinking and coding being introduced at primary school level.”

For the government to be proactive about Australia’s economy, it will need to implement a national STEM skills strategy that produces more STEM graduates and more people with programming skills. Not only that, as Dr Jana Matthews, StartupAUS board member, noted, we need people with STEM skills to also have skills in entrepreneurship so they can turn technologies into high-growth businesses and create new jobs.

“We … need to encourage an entrepreneurial mindset in young Australians and equip them with the practical skills to successfully launch and grow businesses with global potential. The Budget offers no indication that the government recognises this looming skills shortage or has any plans to address it,” StartupAUS stated in its response to the new budget.

The main problem for startups, therefore, is the slow pace of policy changes, compared to the fast pace of startups. Startups feel that the government needs to act much faster.

While this is understandable, it’s worth remembering that the government’s customers are not only startups. The government needs to consider the needs of all taxpayers. Proposing what will help startups and how startups can help the economy are both necessary, but the proposition needs to also consider where funds need to be cut and redirected. From the health sector? From the transport sector? There’s only a certain amount of money the government can work with, given how severely in debt we are. At the moment, criticisms seem to be underpinned by a sense of ‘we deserve it more’.