When the new Prime Minister (PM) Malcolm Turnbull spoke to the media for the first time last week he spoke of a nation of the future that “that is agile, that is innovative, that is creative.”
"We can't be defensive, we can't future-proof ourselves. We have to recognise that the disruption that we see driven by technology, the volatility in change is our friend if we are agile and smart enough to take advantage of it.”
KPMG welcomes the new PM’s stance. One of the key recommendations in our recent tax reform paper was what Australia can do to assist the growth of the nation’s innovation sector. We put forward the idea of an Innovation Company.
While Australian start-ups can often access some seed capital there is a large gap between $2 million of capital and $40 million of capital. A lot of the venture capitalists in this country talk about the ‘valley of death’ where you really can’t get sufficient venture capital at those levels for Australian businesses to start up and expand.
The basic premise is many high net-worth individuals who pay high tax rates would prefer to invest more capital into their own company than necessarily pay more tax. The key here is to use this desire to invest more in their company to the innovation sector’s advantage.
Put simply: investors can inject capital into an innovation company and the investors can access the losses earlier.
This would be basically using the Federal tax system as an incentive to put capital into the start up and innovation community and build new businesses.
This differs from the UK regime whereby tax deductions are given for particular type of fund.
We think a better system involves investors backing a particular company but then accessing those tax benefits which are often trapped in those companies earlier.
It is not a question of the government picking the industry – it is hands-off in the whole process. The government’s role is to give a concession only.
Picking winners and trying to support eco-systems in a particular area is fraught with difficulty and there are numerous instances where governments have failed in this area.
The beauty of the Innovation Company is it’s a specific tax concession for companies, which are designated as innovation start-ups where you can utilise the tax loss if you are an investor.
This is one specific idea KPMG would like the new PM and his team to consider as they take the tax reform process forward.
As has been made abundantly clear at the AFR Tax Reform Summit over the last 2 days, which KPMG has been proud to support, the tax system needs to be considered as a whole before meaningful reform is possible. But it is good to think that innovation will be at the heart of that discussion.