UK scheme a model

Sources have told The Australian Financial Review the tax incentives for investors will be modelled heavily on the United Kingdom's Seed Enterprise Investment Scheme.

Venture capitalists and other investors who hold their shares in an eligible start-up for more than three years will receive a full exemption from capital gains tax.

Labor has promised an upfront 50 per cent income tax deduction for investments up to a maximum of $200,000 per year. The government will seek to better this by offering tax rebates or offset equivalent to a "significant proportion" of the investment.

"In net terms, they will be better off than under the Labor proposal," a source said.

Daniel Petre, left, says: "It is great having a prime minister and innovation minister looking to do all they can in championing this area, but this has to be a multi-year strategy to get it right." Whereas Craig Blair (r) warned safeguards would need to be in place to ensure new systems weren't abused. Louise Kennerley

On Friday, Labor also offered full CGT exemption for equity held in a start-up venture for more than three years.

The overriding aim of the statement is to encourage more private sector investment in start-ups, and for business to make greater use of the university sector, in which up to 70 per cent of the nation's PhD graduates are ensconced.


The 24 initiatives will be broken into four categories: Culture and Capital, Collaboration, Talent and Skills, and Government as an Exemplar.

With regard to talent and skills, there will be changes to immigration law, including the 457 visa system, to enable Australia to poach from abroad both entrepreneurs and people with high-tech skills.

There will be also measures to encourage foreign students studying in Australia to remain in the country on graduation, rather than take what they have learned elsewhere.

One of Australia's greatest innovation failings is its poor record in commercialising ideas.

It is understood that funding criteria for research grants will be changed to encourage universities to collaborate more with business, while there will be an examination of research and development tax incentives to see if that would encourage business to seek out universities.

Bankruptcy changes

In a bid to encourage greater risk-taking, there will be a softening of bankruptcy laws.

Failed investors will have to wait one year instead of three before being able to start a new business quicker. Start-ups which are struggling for traction will be allowed to keep trading in certain circumstances, even if unable pay debts, in arrangements similar to Chapter 11 bankruptcy in the United States.


A source said the changes would strike a balance between risk-taking and recklessness.

In recognition that somebody born today will have up to 17 different careers, there will also be measures to introduce a basic grounding of maths, science and technology across the entire education system, so people carry the skills through life, regardless of their career path.

Industry insiders, who have advised the government on its policy, told the Financial Review that, despite having the kind of build-up usually reserved for a federal budget, the dollar figures attached to programs will ultimately be less important than the sentiment behind them.

Others said the government would need to keep a lid on expectations to avoid a sense of anti-climax once the policy was made public.

With that in mind the government is expected to pitch its announcement as a first step in building a pipeline of innovative companies and suitably skilled workers for the future of the economy.

"There is a lot of work going on, a lot of long-term planning that still has to happen. People need to take a Bex and have a lie down if they think there can be a quick way to make Australia an incredibly innovative nation overnight," high-profile tech investor Daniel Petre of AirTree Ventures said.

"It is great having a prime minister and innovation minister looking to do all they can in championing this area, but this has to be a multi-year strategy to get it right."

Mr Petre's business partner Craig Blair said tax incentives were a nice thing to have, but wouldn't be a game-changer for the local start-up sector. He said safeguards would need to be in place to ensure any new systems weren't abused or misused.


"Our fund is an ESVCLP and offers tax-free returns, and it is reasonable that individuals should get access to that as well," Mr Blair said.

"But we want to avoid the forestry plantation issue where people invest for the tax reasons alone. We want people investing for the innovation opportunities and to see the tax as an incentive rather than a driver."

The innovation statement will also target a skills shortage in tech expertise through visas and education. Funding will be allocated for enacting the digital curriculum and funded schemes introduced aimed at encouraging more females into tech and engineering roles.

One of the more controversial measures tipped by some industry sources include changes to the way research and development tax credits can be earned, to reduce the amount paid to large, established organisations, and redirect it to smaller startups.

Nick Abrahams, a partner at legal firm Norton Rose Fulbright, who has been working for the American Chamber of Commerce in preparing its response to the innovation statement, said an important pillar of the package will also focus on making it easier for smaller companies to win contracts to perform work for government departments.

This could include a directive to consider local suppliers as opposed to multinational giants, in a similar way that the government recently decreed that government agencies must consider cloud computing options when purchasing tech.

"For this to be a success we need to recognise that the current process is counter-productive, and rethink how it would work," Mr Abrahams said.

"We need to have measures to short-circuit the procurement process for lower value transactions, giving local start-ups the chance to earn the money the government already spends on tech, and also giving comfort to government procurement staff that they will not be fired for taking a risk."