Australia holding back startups: AIIA

Association urges changes to R&D, employee share scheme taxation

Australia risks slipping further behind other countries unless it does more to foster technology startups, the Australian Information Industry Association (AIIA) has warned.

In its Smart ICT 2014 Vision report released today, AIIA highlighted Australia’s tax rules related to employee share schemes (ESS) and research and development as major problems holding back the nation’s ICT industry.

“The digital revolution is one of unprecedented social and economic reform and equally unprecedented potential,” the AIIA said.

“However, while Australia’s GDP ranks relatively well within the G20’s top economies and we emerged relatively unscathed from the global financial crisis, concern about the sustainability of the prosperity Australia has enjoyed and the ‘inevitability’ that we will be overtaken by more populous emerging economies – particularly in our region, is emerging.”

One problem is how Australia treats taxation of employee share options, said the AIIA. The issue is currently under review by the government.

Changes to tax rules made under Labor in July 2009 discouraged Australian startups from providing share options to employees. They required that the employee is taxed on the value of the share option when it is issued, before any payments are made.

In other countries, the employee is not taxed until they execute the option. This is said to be better for cash-poor early stage startups, which can use share options as an alternative to a larger salary.

“Across the ICT sector, the challenge of attracting and retaining appropriately skilled talent is especially acute,” the AIIA said.

“The fact that both larger companies (i.e. listed companies) and start-ups in other countries (e.g. the USA, UK, Israel and Singapore) are able to offer greater cash and/or access to ESS benefits, is a major impediment to holding innovative businesses in Australia.

“This is particularly true for innovative start-ups with limited access to capital and cash-flow, competing for staff and skills in a globally competitive market place.”

The AIIA also protested a decision by the Coalition not to move forward with a tax reform to allow R&D tax credits to be provided quarterly rather yearly as it is now. The Coalition dropped the reforms as part of a larger spring cleaning of tax changes that had been initially proposed by the Labor government.

“These arrangements, which would enable eligible companies to realise their R&D tax incentive/credit progressively throughout the year would address cash flow issues that limit ongoing R&D activity and in some cases, ensure the ongoing viability of the company,” the AIIA said.

In addition, the AIIA said regulations have acted as a barrier to increasing funding opportunities for startups.

“With limited venture capital and private equity funding opportunities … many Australian start-ups struggle due to lack of access to capital,” it said.

“While mechanisms such as crowd sourced equity funding (CSEF) have the potential to provide that capital, regulatory arrangements appropriate to the small amounts of capital involved and sophistication of the participants involved, are yet to be defined.”

Adam Bender covers telco and enterprise tech issues for Computerworld and is the author of a dystopian novel about surveillance. Follow him on Twitter: @WatchAdam

Follow Computerworld Australia on Twitter: @ComputerworldAU, or take part in the Computerworld conversation on LinkedIn: Computerworld Australia

Read more: Why corporates can’t innovate like startups

Tags fundingstartupstaxemployee share optionsregulationAustraliaAustralian Information Industry Association (AIIA)employee share schemes (ESS)government

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