Taxing times: Tech needs a holiday

There are many pipe dreams in the Australian start-up sector. Chief among these happy dreams is the notion that the Australian government will end negative gearing in the property sector in favour of new and generous tax breaks for technology start-ups and their investors.

The other happy place that start-ups like to visit inside their heads is a magical land where a tiny slice of the nation’s gargantuan pool of superannuation funds is mandated by government regulation for investment into high-growth tech companies.

I like to go to these happy places too, and there is nothing wrong with that. It's what I like about this industry: It dares to dream big.

Back to the real world

In relation to the very attractive tax-breaks given to property investment in this country, like most of Australia, I am left scratching my head.

However, I can recognise a political reality when I see it. The 1.3 million landlords in Australia who are currently enjoying a gigantic tax holiday also represent 1.3 million Australian voters who want to continue to enjoy their gigantic tax holiday.

The negative gearing of property investment is the third rail of Australian politics, to use West Wing parlance. (Actually, it is one of many, many, many third rails, given the hideously polarised nature of political discourse these days.)

Even talking about ending negative gearing is deadly. This is why you will not find anyone in public office saying anything about this issue other than to reassure investment property owners that the holiday will continue.)

So it does come across as strange that the only people talking about this with any conviction are very big brained and successful start-up luminaries. Maybe they know something that the rest of us don’t.

Or maybe they are just making a fond visit to their happy place, and making generalised comments about the weirdly generous and counterproductive tax treatment of investment properties on the back of second round submissions to the David Murray-chaired Financial Services Inquiry.

The FSI, which is looking at a whole range of different money-related machinery - of which tax is a major component - attracted more than 6,300 submissions. Enough to sink a battleship.

At first glance, it is true that some of these submissions do have suggestions about the negative gearing, its distortive effect on the property market and its cost to taxpayers. And its inequity.

But you don’t need to be a visionary to know that this policy will not be touched. Not by this government and not by the next, or the one after that. That’s where my vision runs out.

Local tech needs a rational voice

Still, it is good for our industry to talk about tax. Australia competes in the world, and we need competitive tax arrangements. It is an incredibly important policy lever.

Of course, there are sections of the tech community that look on tax as an unnecessary evil that must be avoided at all costs. And this makes it difficult for our industry to contribute to tax discussions without coming off as entirely self-serving and ridiculous.

Google and Apple are regularly flogged as the poster children for the insidious and frankly immoral practice of transfer pricing and other related-party transactional practices that are avoid tax “leakage” into our community. But they are hardly the Lone Rangers (to mangle a metaphor).

This is incredibly frustrating for our successful Australian innovators and to our burgeoning start-up community. What compounds this frustration is the fact that there has not been a more urgent moment in the past 20 years for the local tech industry to be up to its eyeballs in this debate.

At a time when the venture capital sector is essentially broken in this country, and the government’s supporting mechanism - the Innovation Investment Fund - has been axed with no replacement policy even hinted at.

This is a time when Australia’s home-grown technology sector - needs a loud and clear voice in the debate about tax and about incentives and about the future of our industry.

It is unfortunate that when our successful tech entrepreneurs start talking about lowering tax-rates on start-ups, and zero capital gains for start-ups, and more generous R&D concessions - and about junking negative gearing on property investments - much of the rest of Australia just wants to chuck rocks at them.

These Australian entrepreneurs need to be heard. Tax-based incentives are notoriously difficult to implement in a targeted way. But if we are to find a way to build our funding sector and out venture capital industry, targeted incentives are what we need to find.

Which brings me to the other happy place: superannuation. Maybe there is a way to provide tax concessions that can make higher risk investments in tech companies more attractive.

Innovation Australia chairman Nicholas Gruen makes some valuable observations on superannuation incentives in the organisation’s second round submission to the Financial Services Inquiry. It is worth a read. You can see it here.

James Riley has covered technology and innovation issues in Australia and Asia as a writer and commentator for 25 years. Read more from James Riley at www.InnovationAus.com or follow him @888riley on Twitter.