David Coleman (Banks, Liberal Party) Share this | Hansard source

I am very pleased to speak on the government's Corporations Amendment (Crowd-sourced Funding) Bill 2016, because this is a very important part of the venture capital industry in Australia, and at the moment it is a missing piece in venture capital and is holding back thousands of Australian companies that are seeking to raise capital, so it is important to provide some background on this issue and where it fits in in the economy.

Venture capital, of course, is about early-stage companies being able to raise money through equity financing where people risk their money by investing in a company in the hope that, in the future, that investment will be successful. Australia has historically a very weak position in venture capital relative to other nations, and there are a whole range of reasons for that. Our small market size is one of them, and there are others as well. Australia, relative to other economies, has had a very small venture capital industry over the years. I have worked in and around venture capital for close to 15 years before entering parliament, so I have had some experience in this area, and the industry has generally been very small indeed—so small, in fact, that the Australian Venture Capital Association estimates that venture capital investment in Australia is about 0.01 per cent of GDP. You do not get numbers much smaller than that—0.01 per cent. Proportionally, that is about one-twentieth the size of venture capital investment in the United States.

So there is a real need to boost venture capital investment in Australia, because more venture capital means more start-up companies, which means more employment. As we know, it is those start-up companies, often in the technology sector, which create the industries of tomorrow and which create so much employment—and generally high-wage jobs, which are so important in an era of relatively low wage growth. So it is very important that the government does everything it can to improve the environment so that small businesses can go out there and raise capital.

In 2014 the corporations and markets advisory committee presented a report to government in which they said that the existing rules related to crowdsourced equity funding were impractical and effectively were stopping companies from raising money. What is meant by 'crowdsourced equity funding'? Basically, what it means is raising small amounts of money from large numbers of people. That is very difficult at the moment because the requirements under the Corporations Act in terms of issuing prospectuses and various minimums for how much can be invested, and a whole range of other things, make it extremely difficult in practice to raise small investments. As a consequence, when companies are trying to raise money they generally go to large, sophisticated investors and larger venture capital funds.

But there is this whole community of investors out there who are investing in other assets at the moment—they might be property, listed shares or a whole range of things. But there is a whole asset base out there that is not really being tapped into by the venture capital sector. What this bill does is basically make it much easier for start-up companies to raise relatively small amounts of money from large amounts of people through changing the crowdsourced equity rules to make them simpler. Effectively, the bill will do this in a number of ways.

Firstly, companies in the future will be able to raise money through an online platform, without the need to go through the typical onerous processes involved in fundraising. There will be fewer of those onerous disclosure requirements and fewer requirements for issuing of documentation and so on.

There are some limitations in how much companies will be able to raise under these provisions. That is appropriate because there is a lower standard of disclosure. It is obviously appropriate to put some limits on how much can be raised in this way, so companies will be able to raise up to $5 million under the government's proposed legislation, with a $10,000 cap per year for retail investors. A retail investor could go onto the website of a company that was seeking to raise capital through crowdsourced equity. They could decide to invest up to $10,000 in that company. If the investor wanted to invest more than $10,000, then they would need to go through a more traditional process which has greater disclosure rules and so on.

It is also important that this is something for smaller companies. This is not something that the government envisages listed companies or larger companies should be able to avail themselves of. This is about helping start-up businesses to access more capital. With that in mind, companies with turnover of more than $25 million or assets of more than $25 million will not be eligible to make use of these provisions.

Also in order to protect investors, the government bill proposes that this be limited to public companies. The government is continuing to consult on extending this system to private proprietary companies, but there is significant complexity involved in doing that and so at the present moment this will be limited to public companies. If a newly-registered public company undertakes crowdsourced equity funding within 12 months of registering, it will be eligible for exemptions from some of those more onerous provisions for public companies, such as holding an AGM, having annual reports audited and mailing out annual reports, if it has raised less than $1 million from crowdsourced equity funding.

So this is very good legislation as proposed by the government. Historically, we have a weak venture capital sector in Australia. We need to improve that. We are improving that—and I will come to that in a moment—but this is a very important part of that puzzle.

In fairness, there are members opposite who have in the past sought to support the venture capital sector—people like the members for Chifley and Griffith, who both do have some understanding in this space. They should be calling on their colleagues to fully support this bill as proposed by the government, because this is a bill which is good for the venture capital sector in Australia. It is good for Australian start-ups and it is something that should be supported as proposed.

But those opposite have a very poor record when it comes to taxation and its impact on Australian business. There are a couple of examples that I wanted to touch on in these remarks. Under the previous Labor government, the Australian start-up sector was given an absolutely disastrous piece of legislation related to employee share ownership schemes. Mr Deputy Speaker, you of course are familiar with how these schemes work. Basically, the way that employee share ownership schemes work is that somebody joins a company, often on a salary which is less than they would get if they were working for a larger company, and the company says to that employee, 'If you work with us for that relatively lower salary we will give you the potential to earn more in the future through access to share options. These share options, which might have very little practical value today, could be worth a lot in the future and, if they are worth a lot in the future, you could potentially do very well by selling those sell options when they vest and become shares.'

That is a very common practice in the start-up sector—or at least it was until those opposite introduced horrendous legislation which basically said, 'If today you as an employee are issued with share options which, in a practical sense, are meaningless today because you cannot sell them usually for several years and, in a practical sense they are not worth anything to you until some point significantly down the track, you must pay tax on them today.' So people would get issued share options which had no practical value, with no capacity for those shares to actually be sold, but then be presented with a tax bill for $20,000, $30,000 or whatever it was to account for the perceived value of these share options. That was absolute madness.

That meant that companies then started saying, 'We won't offer share options because it is a disincentive for employees, because they have to pay this out-of-pocket tax now on something that actually has no value now.' Those same small companies were still in a position where they could not compete with big companies on salary. So someone may have been offered, say, $150,000 from a big company and the small company could only offer, say, $80,000 or $100,000. Previously, the small company would say, 'It is true that we cannot offer you the same salary, but we will offer you these share options which could be valuable in the future.' But, under Labor's previous ESOP legislation, that basically dried up because, when you got issued with those share options, you effectively had to pay a penalty tax, which meant that most employees would say, 'I just don't want them, because I don't want that burden.' That was incredibly bad legislation, but it is a really interesting example because it shows how little those opposite understand how the economy works. It shows the very theoretically way that they think about the economy, but they do not have that practical understanding of how business actually works—how people get stuff done—and how incentives are provided.

That is an earlier example, but we have a fresh example today—and this is quite extraordinary. At the moment, those opposite are proposing as part of their suite of tax proposals to increase capital gains tax by 50 per cent in all areas in which capital gains tax is currently paid. Let's take the example of somebody who has a farm in regional Australia. Maybe that farm is not doing so well and maybe they need to take on some investors to invest in equipment and capital to make that farm do better. Those opposite are saying, with their current policy—and this is something that we really need to reflect on—that if the investors in that farm are successful, when they sell their investment, they should pay 50 per cent more capital gains tax. So if you are that farmer and you are going to try to raise money, that is not going to make your task easy at all; it is going to make it very difficult.

Similarly, let us say you have a situation in suburban Australia where manufacturing is under pressure and a factory closes. Sometimes management and workers might try to get together and keep a facility running by buying that factory and keeping that business going. Under Labor's policy, if they did that and said, 'Actually, we are going to put some money together and keep this factory going,' they would pay 50 per cent more tax on their investment in that factory. That is just an extraordinarily bad idea.

This proposal from Labor applies in every single industry in Australia and every single region. Not just in cities but in every country town and every regional centre, Labor say that capital gains tax should be 50 per cent more—every industry, every town, every state, every suburb. I think it would be very useful for the Labor Party to articulate more clearly to the Australian people why they think it is a good idea to increase capital gains tax by 50 per cent on absolutely everyone in Australia across all industry sectors. It is an extraordinarily bad idea.

This government, by contrast, through the National Innovation and Science Agenda, has reduced tax. There is no capital gains tax on investments in start-ups under the angel investment reforms; taxes have been reduced for those who invest in early stage venture capital limited partnerships; and, of course, there is a 20 per cent income tax deduction for investors in early stage start-ups. Those things have been very well received. We are seeing a boom in Australian venture capital at the moment. It is on the most solid ground it has ever been on. The innovation and science agenda and the tax measures contained in it have been instrumental in creating an environment of confidence in which, increasingly, Australians are coming forward to start businesses and invest in start-up businesses. It is a fantastic thing.

The crowd-sourced equity bill as proposed by the government should be supported by those opposite and, indeed, by every member of this House. I commend the bill to the House.

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