Capital gains means no Silicon Valley for Australia

Australia will never have its own Silicon Valley as long as the government persists with a tax regime that discourages investment in local start-up companies.

That's the message put forth by industry experts and entrepreneurs on the eve of next week's joint national conference of the Internet Industry Association (IIA) and its affiliate, AIMIA (Australian Interactive Multimedia Industry Association).

IIA executive director, Peter Coroneos, said that projects like the governments new BITS program, which will see $158 million raised by the further sale of Telstra delivered to incubators for small- to medium-sized enterprises and R&D local operations, are unlikely to succeed without "fundamental reform to the Capital Gains Tax regime".

"If you invest in any Australian company which then becomes successful, you're going to be hit by punitive rates of taxation, compared to countries like Israel, Ireland and the US," Coroneos said.

"In Australia, we've got lots of innovative people. The problem is because of this punitive tax regime, they're not attractive to investors and venture capitalists."

Coroneos said that while the IIA supported such initiatives as the BITS program, he warned that the current Australian tax rates effectively put a cap on the success most start-ups can hope to achieve.

"Lots of start-ups are being encouraged, but they'll never get beyond a certain size because they won't be able to attract the capital to take them to the next stage," Coroneos said.

"It's like sowing seeds in a rich layer of very thin soil. You'll get excellent germination rates, but the start-ups will not take root and flourish because the punitive CGT regime will deprive them of capital for growth.

"At best, they will be forced to move offshore. At worst, they will simply wither and die," he said.

However, Coroneos said that while the current capital gains tax is one of the biggest obstacles to the success of Australian start-ups, other factors, like taxes on superannuation funds and employee share option programs, also have a discouraging effect. .

For instance, Coroneos pointed out that one consequence of the tax regime is that the sources of capital in Australia are far more risk averse. "Because there's less money to put into these things, they are a lot more choosy about what they invest in," he said.

"They can't afford to have many losses because the cost of capital is so high.

"In the US a VC company will fund 200 start-ups, knowing that 90 per cent of them will fail. They can do this because they know the ones that succeed will do incredibly well, and when they do, they're not going to be hit with punitive rates of tax that can make the whole investment decision unattractive," he said.

Coroneos was also critical of taxes on employee stock option programs.

"There's more than 2000 millionaires at Microsoft, right down to the secretaries, who took stock options in the early days. That can never happen in Australia," he said.

"We've got members who are looking for US investment in their companies, but they can't even afford to let US companies take an equity position by doing share swaps.

"They've got great, world-leading products, but they can't get investment because even if you do a share swap, the tax office still treats that as a capital gain."

Coroneos said problems such as these make a mockery of the government's talk of encouraging Australian versions of Silicon Valley and turning Tasmania into an 'Intelligent Island'.

"The reason that Silicon Valley is so successful is due to a whole range of factors, but the tax regime is very large part it. You also need ready venture capital, innovation, marketing and sales expertise, good access to legal advice that understands IT, and access to a global market -- particularly the US market."

"For that to happen here you have to take away some of the roadblocks, and at the moment, the capital gains tax is identified as the number one issue that needs to be resolved before Australian innovation can compete globally," Coroneos said.

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