A step closer to tax breaks for investors; what can Australia learn from the UK experience?
IW Capital Founder and CEO, Luke Davis
Mon 4 April 2016 - 4:27 pmExpert | Featured | Finance | Funding | Investment | Growing | Industry | Industry Finance | Investing | Investment | Raising capital | Small Business | Starting | Startup | Tech
Entrepreneurs, along with their start-ups and innovative ideas have certainly been discovered as the new ‘best friend’ of the Australian economy – or at least, they have only recently been recognised as such at a governmental level.
Welcome to the ideas boom.
In December 2015, the National Innovation and Science Agenda (NISA) announced a suite of initiatives aimed at nurturing innovation and our start-up landscape; the drivers of tomorrow’s economy. And it’s starting to become reality. On the 16th of March, three months after the announcement, the Tax Laws Amendment (Tax Incentives for Innovation) Bill was introduced to Parliament. If successful, a number of changes will be made to the tax system that have been specifically designed to incentivise investment into innovative, high-growth potential startups.
‘4,500 Australian start-ups said to be missing out on equity finance each year’
The proposed changes are expected to give concessional tax treatment to investors including a 20 per cent non-refundable tax offset on investment capped at $200,000 per investor, per year; and a 10-year capital gains tax exemption for investments held for 12 months or more.
With 4,500 Australian start-ups said to be missing out on equity finance each year according to NISA, the proposed scheme is surely a highly commendable, progressive step in the right direction. But it’s not ground-breaking. To understand where we really are in the ‘grand scheme of things’ and where we’re headed, sometimes it pays to hear an outsider’s perspective. An outsider entrenched in a more mature policy environment when it comes to the role of tax efficient investment schemes.
‘The UK’s experience with tax efficient investment schemes dates back to 1994’
Dynamic Business spoke to Luke Davis, Founder and CEO of IW Capital – a London-based private equity house that has facilitated over £60 million worth of investment opportunities into the UK’s start-up landscape since the business was founded in 2011.
The UK’s experience with tax efficient investment schemes dates back to 1994. Designed to encourage investment in early stage companies, a series of tax reliefs were introduced under the Enterprise Investment Scheme (EIS).
Luke said: “The EIS has been absolutely vital in supporting early stage companies here in the UK. The government-backed scheme offers investors tax reliefs in return for them investing in the nation’s SMEs.
“Since it was launched in 1994, more than 22,900 companies have raised over £12.3 billion worth of funds through the EIS.”
In operation for 22 years, yet its popularity remains vigorous as ever; because – as Luke sees it – investors regard the EIS as an attractive way to manage both their investment opportunities and their tax bill. A survey conducted by IW Capital found that 54 per cent of investors with with more than £40,000 worth of investments were considering investment through EIS for the coming 2016/17 tax year. According to UK government data, 2,795 companies raised £1.56 billion under the EIS in 2013/14, compared to £1.03 billion by 2,470 companies in the previous 12 months.
‘Promoting easy access to capital has been vital in increasing the number of start-up birth rates in the UK’
And that’s from the perspective of investors, but what about the investees – the SME sector; the economic powerhouse?
“Funding is absolutely essential for young businesses looking to upscale. The EIS has been really important in facilitating much needed investment into early stage businesses, and it’s great to see that the scheme is still growing,” said Luke.
“Each businesses that has received funding through the scheme will stand a better chance of evolving beyond their current small business status into established mid-size companies, and hopefully, beyond,” he continued.
Commenting on Australia’s recent strides towards a similar investment landscape, Luke compares the proposed Australian scheme with the UK’s Seed Enterprise Investment Scheme, introduced in 2012. This delivered a further series of tax reliefs targeted at the start-up sector.
Luke says that promoting easy access to capital has been vital in increasing the number of start-up birth rates in the UK. But he asserts that knowledge, education and a collaborative approach to innovation has been a huge part of the UK’s success in developing a robust start-up ecosystem.
“Australia’s innovation policy is a step in the right direction, and encouraging investors to consider tax efficient investments will be a key to its success,” he said.
‘There is enormous potential for Australia to become the leading beacon of financial innovation’
The question remains: what are these “innovative, high-growth potential” start-ups that stand to benefit from the tax amendments anticipated to come into effect in July this year?
With much of IW Capital’s portfolio heavily focussed on on disruptive technologies, Luke says fintech has stood out as a bright spark in a booming digital and tech landscape. According to Luke, fintech is finding increased relevance as consumers and businesses see an opportunity to break away from the status quo.
“It provides companies with easier, faster and cheaper financial systems,” he said.
“Last year, 53% of all European investments into fintech was directed into London alone. Nationwide, a staggering £647.5 million was invested in UK fintech in 2015.
“I believe Australia’s close proximity to Asia opens up some exciting opportunities for the future. Over the long-term, there is enormous potential for Australia to become the leading beacon of financial innovation in the Asia-Pacific region.”
So Australia is headed in the right direction, with a distinct opportunity up for grabs to become a major global player when it comes to ecosystems of innovation and growth – to its own economic benefit. But to make this happen, there’s clearly room for much more from our policy makers.
Luke said “I believe there’s much to learn from the UK, and indeed other more established fintech markets to ensure the optimal development of the fintech industry.”
“I’m very excited to see how Australia’s innovation policy will push the industry forward.”