Sunday, May 22, 2022

William Buck’s Jack Qi Gives the Budget a C Min for Startup Founders: What You Need to Know

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Federal budgets are always fun. When we add to the accusations of pig drumming in the election year, the need to repay a huge mountain of public sector debt, the war in Europe, the specter of rising cost of living and massive labor shortages, we suddenly get a very messy picture.

It’s hard to know where to look.

Last year we rated the federal budget as a “B-minus”† Is this budget better from the perspective of Australian startups?

In a word – No.

Here’s our opinion.

Employee share plans

There has been a lot of talk about the announced reduction in disclosure requirements under the Corporations Act for employee stock plans in privately held companies where each participant pays:

  • Not more than $30,000 per year to acquire the interests (to be accrued for unexercised options for up to 5 years); or
  • No limit on the amount paid, provided the participant can directly benefit from a planned sale or listing of a company.

Details in the budget are scarce. For a number of the above concepts we will have to wait for an elaboration.

Reducing red tape is always welcome, but the elephant in the room is the lack of corresponding relaxation of tax rules. The fundamental issue that remains to be addressed is that when employees are not eligible for the Startup Concession and the employer is a privately held company, people can be taxed long before they are practically able to find a buyer for their shares or options. to find.

The solution is simple: the taxable point must coincide with the liquidity.

patent box

The patent box regime was first introduced in last year’s budget and was intended to encourage medical and biotechnology companies to innovate and commercialize their patented inventions here in Australia by offering those companies an effective tax rate of just 17% on eligible “patent box revenue”.

While these measures have yet to be enacted into law, the government has announced further changes to the patent box, which has been expanded to include patents related to the agricultural sector and low-emission technology.

These measures apply to patents issued or granted after March 29, 2022 and for income years beginning on or after July 1, 2023.

These measures are another step in the right direction, but the patent box as a whole does little for companies that have yet to break even. These undoubtedly make up the majority of startups and scale-ups.

Commercialization of university research projects

$505.2 million will be spent over a 5-year period from 2021-22 for “Australia’s Economic Accelerator” grants to commercialize university research projects from the proof-of-concept and proof-of-scale stages.

Funded projects must align with national production priorities – resource technology and processing of critical minerals, food, medical products, recycling and clean energy, defense and space.

Industry partners will be a key ingredient in this initiative.

An additional $150.0 million will be allocated over 5 years 2021-22 for equity financing through the CSIRO’s Innovation Fund through Main Sequence Ventures. The focus will again be on the Australian Economic Accelerator projects with high commercialization potential to reach large-scale test and prototype stages.

We welcome these measures. Given their alignment with the Australian Economic Accelerator projects, it appears that the bulk of the funding will go to startups and scale-ups that fit into the National Manufacturing Priorities.

We don’t think it’s government’s role to pick winners by deciding which area of ​​innovation is more valuable than others – that should be left to market forces to decide.

Regional Accelerator Program

The government will spend $2.0 billion over 5 years from 2022-23 under the Regional Accelerator Program, focusing on regional infrastructure, manufacturing, skills and training, R&D and education.

This is a worthy measure, but care must be taken to ensure that taxpayers get their money’s worth. The cynics among us will see this as the price of the National Party’s support for the Liberal Party’s goals of carbon neutrality.

Driving the modern production strategy

The modern manufacturing strategy was first introduced in the 2020-21 federal budget to support Australian manufacturers in scaling up, improving competitiveness and building more resilient supply chains in six priority sectors:

  • Resource technology and processing of critical minerals
  • Eat Drink
  • Medical products
  • Recycling & clean energy
  • Defense
  • Room

In this year’s budget, the government announced an additional $328.3 million over the next 5 years to further support modern manufacturing strategy and address critical vulnerabilities in the supply chain.

The main features of the additional financing measures are:

  • $250 million to expand the Modern Manufacturing Initiative to help companies in the six priority sectors deliver high-impact projects.
  • $53.9 million to expand the Manufacturing Modernization Fund to support technology adoption in the six priority sectors.
  • $8.9 million to develop manufacturing investment plans to guide government and industry investment in the six priority sectors.

Again, this is a highly targeted initiative that many startups and scale-ups will miss.

Export Market Development Subsidy

The government announced additional funding of $80 million over the next 4 years for the Export Market Development Grant program, which supports export-ready Australian companies in establishing their presence in overseas markets.

Given the recent outcry from EMDG claimants who received much lower subsidies than they expected, this is a welcome move. However, it remains to be seen to what extent this amount will increase the actual funding of claimants. This uncertainty makes it difficult for cash-strapped companies to plan for their overseas expansion.

Assessing the budget from the founder’s perspective

The above is by no means a comprehensive list of everything that affects Aussie founders and startups. As with all budgets, there are niche measures that will create some very specific winners and losers.

As a whole, there have been no major steps backwards nor bold steps taken to make Australia a world-class environment to build and scale a startup. Entrepreneurship and innovation were never synonymous with treading water.

This is a “small target” Budget, the final rating of which is our “C-minus” because of its lack of ambition and long-term vision.

Our wish list: The top 4 measures to move the watch face for Australian technology

  1. R&D tax incentive modified to include rules written specifically for agile software development
  2. Increase investor maximum discount under the Early Stage Innovation Company (ESIC) tax offset from $200,000 to $1 million
  3. Require government agencies to spend at least 10% of their budget on small Australian businesses (tech or otherwise) with less than $10 million in revenue
  4. Huge increase in skilled migrants with software development, science and engineering skills

Jack Qi is an accountant and consultant for the tech sector at William Buck

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