Tax breaks drew $300 million in investment for Australian startups in a single year

Photo by Ezra Shaw/Getty Images

  • New tax incentives to encourage angel investment in startups triggered around $300 million in investments in the 2016-17 financial year, according to Treasury data.
  • The funds came from 3400 investors and who will have capital gains tax waived on increases in the value of those investments over the next 10 years.

More than 3000 investors poured around $300 million into Australian startups in a single year under new Coalition tax incentives designed to encourage financial support for innovative companies.

Treasury data seen by Business Insider shows an estimated $300 million was invested in 340 “early stage” companies in the 2016-17 tax year.

The funds came from around 3400 investors who availed of new tax breaks introduced under the federal government’s National Innovation and Science Agenda and designed to encourage angel investment in startups.

Under the rules, investors can access a 20% non-refundable carry-forward tax offset on investment, capped at $200,000. They will also be exempt from capital gains taxes on increases in the values of the investment as long as they hold the investment for at least 12 months.

The startup community hailed the new rules when they arrived as a significant step forward in unlocking new sources of investment in early-stage companies.

Federal treasurer Scott Morrison said: “It’s great to see so many companies and investors taking advantage of these new measures which support investment, job creation, and higher wages.”

Morrison said the tax incentives “compliments the Turnbull Government’s broader Fintech agenda which includes open banking and the development of an enhanced regulatory sandbox for new and innovative FinTech products and services.

“The Government is also continuing to build on the equity crowdfunding framework, with legislation to extend the regime to proprietary companies currently before the Parliament, opening up a new source of capital for even more Australian small and medium businesses,” Morrison said.

Shifting investor profile

Stuart Richardson, managing partner at VC firm Adventure Capital and founder of YBF Ventures, said there had been a noticeable shift in the profile of investors in recent years.

“The uptick in activity is exciting but desperately needed from the low base we started – but importantly demonstrates that the entrepreneurial ecosystem is growing in quantity of capital and quality of deal flow,” Richardson told Business Insider.

“We’re seeing new and diverse groups of investors to match the new and diverse opportunities in market – ultimately investors should want to really understand what it is they are investing in,” Richardson said.

He said the continuing evolution of the startup space would provide ongoing opportunities for investors.

“New and emerging domains, like Web 3.0 where YBF are building focus & strength, will see Australia positioned to make an impact on the world-stage,” Richardson said. “Success favors the bold – and its time for us to be bold as a Nation by taking more risk to realize the outsized rewards.”

As recently as three years ago the dearth of available funding was a common complaint from entrepreneurs who struggled to find capital to back their ideas. Over more recent years there has been a surge in activity in the startup sector, with overall venture capital commitments approaching $700 million in 2017, according to recent analysis by KPMG.

The number of deals has been shrinking, however, indicating money is increasingly moving towards bigger investment rounds in larger companies — potentially a problem for companies that are seeking initial funding incentivised by the 2016 tax rules.

“Australia’s startup investment scene has rapidly matured, with professional VC firms raising and deploying increasing levels of capital over the past few years,” Amanda Price, Head of KPMG High Growth Ventures, said last month.

“The speed of growth has been coupled with an evolution in how investors approach startup ventures — with a shift towards pre- and post-series A funding.

“At the same time, we are seeing increasingly sophisticated Australian startups scaling on the global stage.

“With seed and angel funding still a vital part of our startup ecosystem, we are hopeful that the decline in deal number is a temporary shift rather than a major structural change in the VC market.”

The Coalition’s innovation platform in the 2016 federal election was poorly received by voters, but the Turnbull government has recently been reviving parts of its innovation agenda with a focus on capturing a greater share of the global digital economy.