Matthew Canavan (Queensland, Liberal National Party) Share this | Link to this | Hansard source

I move:

That this bill be now read a second time.

I seek leave to have the second reading speech incorporated in Hansard.

Leave granted.

The speech read as follows—

TAX LAWS AMENDMENT (TAX INCENTIVES FOR INNOVATION) BILL 2016

I am proud to introduce this Bill which amends our taxation laws to implement a range of incentives to drive economic growth and jobs in our transitioning economy.

These measures shall help encourage innovation, risk taking and an entrepreneurial culture in Australia.

These measures comprise the heart of the Government's National Innovation and Science Agenda, and represents its commitment to making Australia a more modern, dynamic, 21st century economy.

These actions also go towards ensuring Australia remains a world leader when it comes to doing business.

The Government is investing $1.1 billion to incentivise innovation and entrepreneurship.

This Bill delivers upon two commitments: providing concessional tax treatment to investment in innovative,

high-growth startups; and reforms to the arrangements for venture capital limited partnerships to improve access to capital, and make the regime more user-friendly and more internationally competitive.

The first measure, Schedule 1 to this Bill, amends the Income Tax Assessment Act 1997 to improve investment into early stage innovation companies through incentivising investors with business expertise and experience to assist entrepreneurs with commercialising their concepts and ideas.

The second measure, Schedule 2 to this Bill, will amend the Venture Capital Act 2002 andthe Income Tax Assessment Act 1997 to reform the arrangements for venture capital investments, which is expected to attract greater levels of investments at the growth stage of developing a concept, while improving the international competitiveness of investing in entrepreneurs at this stage of the financing life-cycle.

This Bill is an important step for Australia – investors, venture capital funds and innovation companies in all industries will benefit from these measures.

These measures have specifically been designed to foster a shift towards a culture of innovation, whereby entrepreneurial risk-taking is encouraged and rewarded.

The Tax Incentives for Early Stage Investors measure aims to support early stage investment by encouraging more businesses to develop innovative ideas.

Within the early stages of an innovation company's financing life-cycle, difficulty attracting funding can prevent entrepreneurs from developing and commercialising their ideas. In fact, this stage is sometimes described as the 'valley of death' where many startups find themselves unable to meet their cash flow requirements. It is important that the Government helps connect business expertise with entrepreneurs so that innovative ideas can reach the market through commercialisation.

The tax incentives include a 20 per cent carry-forward non-refundable offset on investments capped at $200,000 per year, and a 10 year exemption on capital gains tax for investments held in the form of shares in the innovation company for at least 12 months, provided that the shares held do not constitute more than a 30 per cent interest in the innovation company. The tax offset will be available upon investment, not when the funds are used by the innovation company, and any sale of the shares will be taxed on a 'deemed capital account' basis.

Innovation in Australia is dynamic. A regulation making power is also included so the Government can keep the measure up to date.

The tax incentives for funding provided through venture capital limited partnerships including early stage venture capital limited partnerships are designed to attract investments at the growth stage of a company's development. At this stage, entrepreneurs can face further difficulties accessing funding, despite typically receiving a few rounds of initial funding, as they are not yet able to market themselves for public or broader investor buy-in. Although Australia has experienced recent momentum in this field, with over $600 million in venture capital raised or planned since 30 June 2015, this funding has been generally concentrated within the technology sector. The measure will continue to build on the current momentum through improving funding for promising projects across the economy and in industries beyond the technology sector.

We are introducing a number of new arrangements to venture capital limited partnerships and early stage venture capital limited partnerships. Notably, there will be

Once the Bill receives Royal Assent, these incentives will apply to the 2016-17 income year.

Consultation has been conducted across a range of sectors and industries, including experienced investors, startup founders and industry bodies, to design these measures in a way that attracts investment without creating unnecessary regulatory burdens on either the Government or entrepreneurs.

We are answering the call from industry. We are creating the ecosystem that Australia needs to succeed in this modern world.

We are setting up the environment to reward our innovators and our entrepreneurs who have the concepts and ideas to benefit all Australians.

Backing innovation to drive productivity is part of the Turnbull Government's economic plan to successfully manage our transition. The Turnbull Government knows that our transitioning economy requires increased investment and we will build the conditions necessary for that investment.

This is another practical example of how the Turnbull Government is acting to support the positive transition that is taking place in our economy.

Doug Cameron (NSW, Australian Labor Party, Shadow Minister for Human Services) Share this | Link to this | Hansard source

I rise to speak on the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 on behalf of the opposition. Before I go into the details of the bill, let me just make some passing comment on Senator Canavan leading with his chin in his summing up of the last bill. If those opposite want to talk about the economy, let's talk about debt increasing under the coalition; let's talk about the tax-to-GDP ratio increasing under the coalition; let's talk about full-time jobs disappearing under the coalition; let's talk about the rabble that this government was over the last 3½ years, when they attacked pensioners, attacked working people and had no idea about how an economy could be run in a fair and reasonable manner.

Yes, Senator Canavan, we are happy to talk about the economy, but when we talk about the economy we talk about fairness and a fair go for Australians in this economy—unlike what was in that horrible, terrible 2014-15 budget that you guys presided over after the last election. We are happy to talk about the economy, but when we talk about the economy we talk about fairness. We do not chase companies like GM and Toyota out of the country. We do not do that, because we know that they can be a driving force for small businesses and small start-ups in this country. We know that they are high tech. We know that they are innovative. Unfortunately, the coalition did not have a clue.

The coalition now seems to be led by the nose by the National Party, the biggest rorters that this country has ever seen—the National Party out there rorting, led by former Senator Joyce, now the Deputy Prime Minister. We do not need a comedian for a Deputy Prime Minister; we need a serious person for Deputy Prime Minister. That is certainly not what we have got under this coalition government. We do not have a serious Prime Minister. We do not have a Prime Minister who can advocate a policy from morning until night and hold a policy from morning to night.

So, yes, Senator Canavan, we are happy to talk about the economy. We are happy to talk about the former Treasurer, the guy who spoke about 'lifters and leaners', who is 'leaning' over in New York and Washington. We are happy to talk about that. If you are a pensioner you are a leaner, but not if you are taking your golden handshake from the coalition. We are happy to talk about the coalition finance team, sitting there cracking out the Havanas.

Chair, I know what you are trying to do here.

Zed Seselja (ACT, Liberal Party) Share this | Link to this | Hansard source

Sorry?

Doug Cameron (NSW, Australian Labor Party, Shadow Minister for Human Services) Share this | Link to this | Hansard source

I know what you are trying to do, but, if you want him to stand up, he will stand up if you ask him to stand up. They were cracking out the Havanas—

Zed Seselja (ACT, Liberal Party) Share this | Link to this | Hansard source

Senator Cameron, order!

Doug Cameron (NSW, Australian Labor Party, Shadow Minister for Human Services) Share this | Link to this | Hansard source

cracking out the Havanas after—

Zed Seselja (ACT, Liberal Party) Share this | Link to this | Hansard source

Senator Cameron, order! Order for one moment. I am not quite sure what the crack at the chair was, but you can—

Doug Cameron (NSW, Australian Labor Party, Shadow Minister for Human Services) Share this | Link to this | Hansard source

I just saw you desperately trying—

Zed Seselja (ACT, Liberal Party) Share this | Link to this | Hansard source

You can continue.

Doug Cameron (NSW, Australian Labor Party, Shadow Minister for Human Services) Share this | Link to this | Hansard source

A point of order: I just saw you desperately trying to get Senator Canavan to stand up and intervene.

Zed Seselja (ACT, Liberal Party) Share this | Link to this | Hansard source

No, order! Reflections on the chair are disorderly, as you know, Senator Cameron.

Doug Cameron (NSW, Australian Labor Party, Shadow Minister for Human Services) Share this | Link to this | Hansard source

Chair, with the greatest respect, you are supposed to be impartial. You are supposed to be impartial.

Zed Seselja (ACT, Liberal Party) Share this | Link to this | Hansard source

Senator Cameron, reflections on the chair are disorderly.

Doug Cameron (NSW, Australian Labor Party, Shadow Minister for Human Services) Share this | Link to this | Hansard source

I am just saying you are supposed to be impartial. I am just drawing your attention to how you should operate.

Zed Seselja (ACT, Liberal Party) Share this | Link to this | Hansard source

I would ask you to desist from reflecting on the chair and continue.

Doug Cameron (NSW, Australian Labor Party, Shadow Minister for Human Services) Share this | Link to this | Hansard source

If you thought I reflected on you, I withdraw. Senator Canavan, I am happy for you to be raising these issues, because we could go on more and more. After the last budget, your Treasury team were out there smoking away on the Havanas—probably worth more than most other people could afford to put food on their table for the week.

I can inform the chamber that, regardless of what Senator Canavan said, we will be supporting this bill. We welcome the opportunity to make a contribution to the debate on the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016. Our contribution will be an important contribution. Both sides of politics recognise that changes in this area are required and need to be made for a number of very important reasons. We welcome the opportunity to add our comment to the outcomes being sought to be achieved by this bill.

Labor certainly recognises that jobs of the future will be generated by today's investment in smart, innovative, Australian enterprises. With an estimated two out of every three Australian jobs expected to be impacted upon by automation between now and 2030, the challenge is definitely to create new jobs. That challenge is serious and demands a serious policy response by government.

On our side of the chamber, through the release of three waves of innovation policy—while that lot were too busy carving each other up, we were into our third wave of innovation policy release—Labor have proposed a very comprehensive framework of measures designed to encourage the emergence of new, innovative companies in Australia. These policies include teaching young Australians coding and the value of computational thinking; boosting the numbers of STEM graduates and qualified STEM teachers; creating a start-up university to help launch 2,000 new enterprises every year; providing a $500 million smart investment fund to back new ideas; and establishing a regional innovation fund to encourage talent in our regions to be actively involved in the nation's effort to become a smarter, rich country.

Importantly, Labor has also proposed changes to our taxation system and the rules applying to venture capital in this country. We do this to help ensure that the money is there to nurture and develop good ideas and to transform them into strong, new firms generating jobs of the future.

Why in particular are the types of things that are being encouraged by this bill and also by what the opposition has put forward important? They are important for a number of reasons. Firstly and primarily, start-ups typically find it more difficult to access capital than their larger commercial counterparts. This is mainly because of a lack of prior financial history, limited supporting collateral and ultimately their risk profile. They are engaged in early-stage innovation, which by its very nature has a greater degree of risk and is something that some financial institutions will not necessarily embrace by extending capital to those types of innovations and to that type of activity at that point and at that stage in their life cycle. It is hard to find that amount of support.

Strengthening capital flows within this ecosystem will deliver substantial support to early-stage innovation. The two major sources of support at this point are, first, angel investment—that is, high-net-worth individuals on incomes largely around the $250,000 per annum mark who are willing to dedicate some investment towards early-stage innovation companies—and then, later down the track, venture capital, which will enter the field to also support investment through series A and further investment rounds. However, Australia has not necessarily had the best track record in this space.

On our side of the political fence, we have also argued for reforms to the early-stage venture capital limited partnerships. We know that this legislation will make some changes in this space. We certainly believe that venture capital funds of between $10 million and $100 million invested in Australian businesses are entitled to preferential tax treatment through the ESVCLP program, and that entitles a fund to flow through tax treatment and its investors to receive a complete tax exemption on their share of the fund's income, both revenue and capital. We outlined further changes that we believed could be embraced to promote this. We note that this will be an area that we will continue to focus on should we be granted the opportunity to gain government.

We welcome the fact that the government's announced policies via this bill reflect, in large part, the ideas that we spelt out in November last year—in particular, to introduce an Australian angel investment scheme and liberalise the early-stage venture capital limited partnerships framework. In relation to the angel investment scheme, we argued for an up-front 50 per cent tax deduction for investments up to a maximum of $200,000 per annum. We also advocated a carry-back tax relief mechanism if investors do not reach the maximum $200,000 cap in any particular year; full capital gains tax exemptions for equity held in start-up ventures held for greater than three years; that any realised losses following in the scheme could be deducted against wage and salary income; and deferral of capital gains tax on investment if that investor directs a prior capital gain into a new start-up venture to help keep rolling investment and building support in the sector.

We want to see support flow through to the early-stage innovators as quickly as possible, and, considering the time remaining in the parliamentary term, the opposition will largely support this bill. However, we wish to indicate our intention to review some key elements of the bill if we are successful in winning government, and we would indicate one area where we believe that both parties could actually work constructively to benefit the start-up community today.

The key elements of this bill are tax incentives providing a 20 per cent carry-forward, non-refundable offset on investments, which will be capped at $200,000 per year, and a 10-year exemption on capital gains tax for investments held in the form of shares in early-stage innovation companies, as they will be defined, for at least 12 months, provided that the shares held do not constitute more than a 30 per cent interest in an innovation company. An early-stage innovation company, or ESIC, is defined as an Australian incorporated company that is in the early stage of its development and developing new or significantly improved innovations with the purpose of commercialisation. The tax offsets will be available upon investment, not when the funds are used by the innovation company, and any sale of the shares will be taxed on a 'deemed capital account' basis. A regulation-making power is also included so that measures can be updated as required. This is an important flexibility mechanism. A number of new arrangements to venture capital limited partnerships and early-stage venture capital limited partnerships are being introduced—notably, a non-refundable tax offset of 10 per cent of the value of new capital invested into early-stage venture capital limited partnerships during the income year; an increase in the maximum fund size of early-stage venture capital limited partnerships from $100 million to $200 million, providing improved access to funding from managed investment trusts; and broadened and simplified rules for both venture capital limited partnerships and ESVCLPs. The tax incentives introduced by the bill will be available to all types of investors.

However, considering the high level of risk associated with investment in ESICs, this bill limits the risk exposure of retail investors to no more than $50,000 per year, and sophisticated investors will have no restriction placed on the amount of money they wish to invest, bearing in mind that an offset cap will be applied. Once the bill receives royal assent the incentives will apply to the 2016-17 income year and the government intends to review the incentives after a period of four years to determine how well they are delivering on policy objectives. We welcome this wholeheartedly.

What is good about the bill? The government has applied a principles based and objectives based test to help determine the legitimacy of a company styling itself as an early-stage innovation company. That is a good thing. It will attempt to better target the concessions towards genuine innovation companies and should be welcomed in principle. These measures are reinforced via the application of general anti-tax-avoidance rules, which will apply to prevent taxpayers from being able to obtain tax benefits by entering into artificial or contrived arrangements to access the tax offset. That is another important mechanism, which obviously received support from our side. It has been a longstanding provision and it is an important mechanism in there.

There are also elements of the bill that we consider warrant further consideration, and we flagged this to the government. It appears that start-up founders will be prohibited from accessing the tax concessions provided for in the bill. This does seem a little harsh insofar as start-up founders often dig deep into their own pockets to invest in those companies. They do so at great risk and they also sacrifice a great deal in the process. We would certainly be open to reviewing this down the track to see whether or not this constraint is liberalised.

It has been pointed out that these start-ups can, through their founders, access the support that comes through the R&D tax offset, for instance. A lot of companies and a lot of start-ups indicate that they are very much in favour of the R&D tax concession system. In some cases start-ups have said to me that it is the defining point as to whether they will stay in Australia or move overseas. If we have that system in place, that is a good thing. Having said that, while the R&D tax offset is very important we certainly think that consideration should be given to extending that benefit down the track to start-up founders, who, as I said earlier, sacrifice a great deal and are doing important work for the nation's economy. We commit to reviewing this oversight after the bill takes effect.

While overlooking the inclusion of start-up founders and directors in receiving this tax benefit, the bill seeks to improve the targeting and identification of suitable investors—that is, that they are investing in the right type of company in order to qualify for tax incentives. The issue with the current structure is that the bill places the onus of reporting primarily on innovating companies themselves and their reporting to the ATO will help later validate the tax offset claim.

Secondly, while prohibiting founders from accessing the concessions, the bill allows trusts and companies to access the benefits. As I indicated earlier, the opposition and the government both modelled their taxation reforms in this area largely on the system that operates in the United Kingdom. This scheme has seen, as I indicated earlier, new enterprises and jobs created. Unlike the UK scheme, which expressly prevents trusts and companies from accessing similar taxation concessions, the coalition will allow trusts and companies to take advantage of these liberalised arrangements. While the specific arrangements in the bill aim to improve tax benefits to investors who make genuine investment in early-stage innovating companies, this means that minor innovations or practices that do not represent actual innovations—like a company introducing a new product in Australia that is already being sold elsewhere—will not be eligible for tax incentives. While we will not oppose the arrangement allowing trusts and companies to access the tax benefits at the moment, we will leave open the option of reviewing this measure in due course, but we will only make any changes pending the outcome of such review after extensive stakeholder consultations.

Thirdly, under Labor's policies we will not cap the capital gains tax exemption for innovation investors to 10 years, which is what the government proposes in this bill. We take this position because development and commercialisation of ideas takes time. Sometimes start-ups will start on one course with one idea and then pivot to something else, and their development process does take time. That is why our policy will not impose a 10-year cap in the way that the government proposes. We believe that any capital gains that are immediately directed into new ventures should remain capital gains tax free.

Finally, Labor notes that, when the government made the announcement on these issues in early December, they did two things. One is that, in the venture capital space, they said that the measures that are being put in place do not take effect until 1 July. As people in the start-up community have pointed out, the unintended consequence of this is that it created an investment hiatus where some potential angel investors would hold off investing in new start-ups or extending angel investment until the new arrangements take effect on 1 July. Some people have dubbed this an 'investor strike'. In late March, we raised our concerns about this. In late March, we publicly committed to work with the government on bringing forward the start date of these measures to, at that time, 1 April. The government ignored the offer. It is hard to believe that they could see much needed capital being held back from start-ups today in the interests of meeting an artificial, self-imposed start date. The delay of investment decisions is a real problem and a lot of people have said that it gives them concern. People on the public record have expressed their concern. There are people working to help boost angel investments in this space. I note that last year, for example, KPMG released a very important guide on educating angel investors. A lot of people in the start-up space laud the bipartisanship of both sides of politics on these issues.

This is a bill that Labor recognises is important for the jobs of the future. They will be generated by today's investment in smart, innovative Australian firms. We welcome this legislation and give it our support. (Time expired)

Nick McKim (Tasmania, Australian Greens) Share this | Link to this | Hansard source

The Greens will also be supporting the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 as it provides tax incentives for people who want to invest and companies that want to invest in innovative businesses in Australia. It is worth pointing out that the online revolution that is underway in this country and around many parts of the world at the moment is incredibly disruptive, but it does provide opportunities for people to be innovative and to use the internet to match supply and demand in a way that has never been available before for humanity.

We have an amendment that we will be proposing because we think there is a gap in the legislation. The gap that we would seek to fill is around social enterprises. It is important that people understand that there is a movement developing in Australia around social enterprises—that is, a company that has not only an economic mission but a social, cultural or environmental mission consistent with a public or community benefit. We think that those companies should also have the opportunity to attract further investment by the way and the means that the bill proposes for companies that have an economic aim. Ultimately, there are people forming companies in Australia and right around the world not with the aim of one day listing on the ASX or any public stock exchange but making the world a better place. It is very important that they receive the same level of encouragement as people who are engaging in innovation with a commercial end in mind.

It is worth pointing out that this legislation amends Australia's tax laws. It is very disappointing that the government has focused only on this and they are not using the very big levers that are available to public policy makers in this country to change our tax laws to address one of the fundamental issues facing Australians at the moment, and that is economic inequality in this country. At the moment in Australia, if you are a property speculator or an investor buying your fifth or your tenth or your 50th investment property, you get more direct financial assistance from the Commonwealth government than a young couple trying to buy their first home. It is a disgraceful situation that in Australia we would prioritise property speculators and property investors over and above the needs of a young Australian couple trying to buy their own home. We need to get on top of negative gearing; we need to get on top of the capital gains tax discount. 2While we welcome Labor's baby steps on those issues and their belated joining with the Greens to propose some addressing of the capital gains tax discount and some addressing of negative gearing, we say to the Labor Party, 'That is a good start, but you have a long way to go before you can truly lay claim to be addressing the massive economic inequality that is driving people apart in this country.'