Australia needs to incentivise start ups to stay by competing with schemes available in other countries

Entrepreneurs leaving Australia

Two more plane loads of tech entrepreneurs leave Australia for the US and UK

Everyone in digital has a side project – the measure of how long you stay in your day job is when that side project reaches the point that it can become your day job. These side projects are often the way great companies are born.

In the world of digital media and advertising a huge amount of innovation is coming from start ups: Outbrain – Isreali start up now powering “Other content you may like” widgets on sites from The Guardian. Time Out, SMH and many others. Kickfolio – new Melbourne start up that allows you to embed your iOS app on a web page which can be viewed on all platforms. Numerous household names in media were recent start ups too: Facebook (US), Spotify (Sweden), Instagram (US) and Pinterest (US).

Recently the government held a high profile digital summit and invited leaders of companies like Google and Microsoft. I wasn’t there but The Australian reported that “Prime Minister Julia Gillard has been told Australia has the key ingredients to become a silicon beach”. As there is an election on the way, it is time to say: this is not true – Julia was mis-informed.

Australia may be a good place for R&D for larger established companies but many start ups are being stifled or moving abroad as soon as there’s any progress.

Here are two issues that need fixing and now is a good time to start lobbying.

1) Employee Share Option Plans

Reforms passed in 2010 were designed to close loop holes but have made it expensive for early stage companies to issue share options to employees.

In Australia share options for employees are taxed when they are issued – even if it might be that the employee never exercises the option. So a start up here issuing share options will generally be hit for tax by the ATO at the time the option is issued and not later when the shares are acquired by the employee as would be the case in the US. Start ups tend not to have spare [any?] cash so this is an unfortunate expense.

We all know that share options are an absolutely essential part of going to work for a start up where the salaries might be lower. These rules make Australia less competitive and more expensive for start ups.

2) Better tax breaks for early stage investment

The UK has just introduced the Seed Enterprise Investment Scheme – SEIS. This very attractive scheme allows individuals to invest up to £100,000 (around $150,000 AUD) per year in an early-stage company and immediately reclaim 50% of the investment against their income tax bill. Yes, that is right – 50% reclaimed against income tax immediately – 50% reduction in risk. In addition, if the shares are held for 3 years there is no capital gains tax at all when they are sold.

This is a dream scheme for very early stage start ups.

It’s not hard to move a tech start up – with all servers and software probably already in the cloud then it could be just a few key people moving to another country – and then IP, growth, employment & tax revenue and experience goes with them – start ups rarely move back.

To break the familiar cycle of tech start ups looking to move to the US, Australia needs to go above and beyond what is available there or elsewhere – now is the time to lobby for a world-beating tax and investment framework for innovation and new digital companies. Get emailing.

Reference articles

The Australian – Australia can be silicon beach

The Australian – Tax reform has killed viability of share options

SMH – Tax policy ‘hitting’ entrepreneurs

UK’s Seed Enterprise Investment Scheme