Last night’s Federal Budget has generally been received as an “election-preparation budget” rather than another attempt at significant structural change. We don’t disagree. We’ve gone through the budget papers and initial expert analysis and here’s our perspective on how the changes announced will influence the tech startup industry in Australia.
Who are you calling “Small Business”?
Although some industry commentators congratulated the Treasurer on being the first to mention the words “Innovation” in a budget speech (he apparently said it no less than three times), at BlueChilli we were annoyed by the Treasurer and Prime Minister referring to us all as “small businesses”.
As pleased as we are at the Government wanting to support “those who want to give it a go” in their Budget, we tech startup entrepreneurs aren’t building “small businesses”. We are trying to build billion dollar businesses. Most of us will not succeed, but the goal is not to build a $2M annual turnover business that employs a handful of people, pays the mortgage and puts the kids through school. Our industry is about disrupting industries, going global, and being a small business for a very short period of time. Too many of the announcements in the Budget meant to benefit our industry are actually meant for small accounting practices, hair salons and franchise owners; business categories which Australia needs too, but which are very different to tech startups.
To change the imbalanced composition of Australia’s GDP away from resources and banks towards more intellectual property and innovation, our nation needs a significant commitment to addressing the need for more STEM graduates, providing tax and other incentives to startup investors, and increased government funding to match private-sector investment in startup incubation, acceleration and commercialisation. There’s none of that in the budget. Here’s what there is…
Asset write-off: good time to be an electronics retailer
The $20,000 small business asset write off will likely have a desired stimulus impact on the broader economy. In other words, the impact on early-stage tech startups is probably little more than everybody gets a new iPhone or MacBook, which is nice, but doesn’t create more tech startups or make a significant difference to the survival rate of our existing tech startups. If you’re considering doing a startup, you probably already have a laptop and a smartphone. At least this simplifies the depreciation and asset categorisation process for early-stage startups with turnover of less than $2M. We think the threshold should have been set at $5m not $2m.
Company setup deductions: expect legal and accounting setup fees to go up a little
From July 2016, new startups will be able to immediately deduct professional costs associated with starting up a business. This is a useful, pragmatic change that the industry has advocated for. However, any economist will tell you that making these costs immediately deductible (vs deductible over five years) means these costs will probably go up a little as your accountant and lawyer know you’ll be able to write it off. So your tech startup’s establishment costs may actually go up — a cost you’ll have to bear until you can claim it.
Business registration streamlined: an easier first week in business
Although details are still sketchy, the Government promises to streamline the process of registering a new business by making it all available from a single online registration site. Again, this is a nice-to-have improvement — it’s not going to materially affect the number of new startups or their likely success rate. The now fully-deductible lawyer or accountant could also do this for you.
Changing legal structure free of CGT: at last, something significant
Startups often run into unexpected and costly Capital Gains Tax (CGT) expenses if they need to change the structure of their business (for instance, if changing an initial Partnership into a Pty Ltd company so that shares may be issued and directors appointed.) Under the proposed changes, tech startup entrepreneurs will be able to change the legal structure of their early-stage business without incurring a CGT liability. In our opinion, this is the only significant change in the budget measures announced last night, and one that should be celebrated with a polite applause. Good move, Government.
Also of note: ESOP, crowdfunding and regulatory relaxation
The Government had also previously announced employee share ownership plan (ESOP) changes that will allow many early-stage tech startups to offer share options to employees, which may allow you to reduce your salary costs and make it easier to retain key staff. The Government has also announced plans to make it easier to offer equity crowdfunding (which could make it easier to raise a seed round) and has stated it will investigate whether some of the regulatory requirements for companies can be removed or relaxed. We look forward to further detail on that.