Government to address startup issues after long wait

'Competitiveness agenda' to address taxation of employee share options

“The government has a role to play as a catalyst for investment and innovation," says Canva CEO Melanie Perkins (pictured with chief evangelist Guy Kawasaki). Credit: Canva

“The government has a role to play as a catalyst for investment and innovation," says Canva CEO Melanie Perkins (pictured with chief evangelist Guy Kawasaki). Credit: Canva

The Coalition government plans within weeks to release details of its plans for promoting tech startups in Australia, including changes to employee share option (ESOP) taxation rules, as part of a wide-ranging economic reform package.

The proposals will arrive amid frustration by the startup scene over the long wait for key regulatory changes and more detail on government funding for entrepreneurs.

“In the coming weeks the government will release details of its 'competiveness agenda', which will provide the blueprint for industry and economic growth,” according to a Department of Industry spokesperson.

“Some of the proposals before the taskforce working on the competitiveness agenda have included employee share schemes, IP, competition policy and barriers to trade and investment.”

The competitiveness agenda is also expected to include a proposal about regulation of crowdfunding, according to Nick Abrahams, an attorney with Norton Rose Fulbright who works on startup tax issues.

The National Industry Investment and Competitiveness Agenda taskforce was announced in December 2013 and comprises Primie Minister Tony Abbott, Treasurer Joe Hockey, Industry Minister Ian Macfarlane and the Minister for Trade and Investment, Andrew Robb.

The government has committed more than $1.4 billion to the initiative, the Department of Industry spokesperson said.

Some in the tech startup scene have grown frustrated after there appeared to be little action after a year with the Coalition in charge.

At first, startups were upbeat after the Coalition’s win in last year’s election – in part because of Communications Minister Malcolm Turnbull’s business and technology background.

But the Coalition government's first year has seen key startup funds cut, and – despite discussions at the Treasury – no action yet to allow startups to provide share options to their employees.

“The chance for positively impacting the sector has not been fully realised to the extent that it could have been,” said Stephen Baxter, River City Labs managing director and StartupAUS board member.

“There are many handbrakes that could be removed from the sector … whilst, with vision, they could also do a lot to accelerate the sector. This could be a positive message for the government to run with if given the appropriate emphasis.”

However, Local Measure CEO Jonathan Barouch said he is “cautiously optimistic that the government is now thinking about the problems facing our ecosystem.”

Local Measure is a Sydney startup that sells a location-based platform for monitoring social media.

“I think it is fair to say I have been a bit taken a back at the delay in getting some of these policies out but am still hopeful that we’ll have some sensible policy announcements to support the ecosystem this year,” Barouch said.

He said Local Measure was recently visited by Paul Fletcher, the parliamentary secretary to the minister for communications.

“Some of the things he and Malcolm Turnbull are talking about are some of the items that the startup community are most concerned about.”

Turnbull, who has spoken in favour of ESOP reform and other startup issues, declined to comment for this story.

Richard Earl, founder of Talent International, a technology recruitment firm that supplies thousands of contractors to companies around the Asia Pacific, said progress on startup matters may be out of Turnbull’s control.

“Malcolm Turnbull is a forward-thinking kind of guy,” he said. “I’m not sure how much influence he has. Tony Abbott as prime minister and Joe Hockey as the treasurer are probably calling the shots more.”

That could be a problem, he said. “I don’t think Australia is really aware or thinking of this sector at a government level. It urgently needs to.”

Canva CEO Melanie Perkins said government support is critical for Australian innovation. Canva is a Sydney-based startup that has developed a Web-based graphic design app.

“Anything we can do to support startups in Australia is a good thing,” she said. “As a country, we should be doing everything we can to foster this new wave of technology innovation and setting up Australia to be competitive in the future.

“The government has a role to play as a catalyst for investment and innovation. Australia still has a fledgling startup ecosystem and it’s important that we continue to support the tech industry.”

Employee share options

Tax rule changes made under Labor in July 2009 have 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 better for cash-poor early stage startups, which can use share options as an alternative to a larger salary.

Changes to the ESOP rules are expected to be included in the government's competitiveness agenda, said Abrahams, who has participated in the ESOP debate. “It has been a long time coming and I do not expect the reforms to be far reaching.”

“Call me an optimist but I remain hopeful that this round of ESOP reform may help ease the greatest area of pain – namely early stage companies looking to give options to employees. Remaining issues can be dealt with in further rounds of review.”

Baxter said action in this area is critical. “Easy wins such as ESOP should be acted on as soon as possible and the sector fails to understand why this cannot happen sooner rather later.”

Government funding

The startup scene voiced disappointment when in the budget the Coalition government cut two startup funds – Commercialisation Australia and the Innovation Investment Fund.

The cuts sent “a terrible message out at a time when many other governments have been coming out with some pretty innovative schemes,” said Earl. The funds “probably didn’t need to be cut. They probably needed to be tweaked a bit.”

The government is expected to soon provide more detail on its Entrepreneur Infrastruture Programme, which was set up as a replacement for the startup funds cut in the budget, said Barouch.

“I think most startups and the community are very keen to understand how this program will help support the next wave of entrepreneurial technology companies grow in Australia.”

What is known is that the $484.2 million program includes a “commercialising ideas” element that is set to commence in late 2014, according to the Department of Industry.

This will include “advice from people with relevant private sector experience, small co-contributions for re-engineering or growth opportunities for business and connection and collaboration opportunities,” a spokesperson for the department said.

Jessica Evans, co-founder of B2B healthcare startup Vimcore, said she has not had positive experiences with grants from the Australian government and advises startups to look to the market instead.

“Governments are notoriously slow, bureaucratic and conservative – the very antithesis of what a startup business needs,” she said.

“You've got to ask yourself what will be better for your business – pouring six months of efforts into obtaining a government grant” or “pouring six months of effort into networking, meeting potential clients, talking to your target market and getting early stage users.”

Adam Bender covers telco and enterprise tech issues for Computerworld and is the author of dystopian sci-fi novels We, The Watched and Divided We Fall. Follow him on Twitter: @WatchAdam

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

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Tags startupsCommercialisation AustraliabudgetEmployee Share Option Plan (ESOP)electionGovernment fundingCoalitiongovernment grantsgovernmentcompetitiveness agendatech startupsemployee share optionsAustralia

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