Monday, 2 May 2016
Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016; Second Reading
It gives me great pleasure this afternoon to speak on the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016. Over recent weeks, there has been a lot of debate and discussion about putting more money into education and hospitals and into roads. But what we really need to understand is that the only way we can truly do so is if we have an economy that is creating additional wealth. We in the government do not have any money or resources ourselves. The only way that we in government can get those dollars to put into all those social services—to pay for our pensions, to put more money into education and health and towards kids with disabilities—is to have an economy that is growing and creating wealth. The only way to do that is by having the economic settings that have incentives for risk-takers to go out there and start up new businesses, to experiment with new ideas and to look at their existing products and take them to new markets. That is what we have done with the free trade agreements. We need to remember that 98½ per cent of the world's economy lies beyond our shores.
Another way that we get innovation—the creation of new products and services—is by encouraging businesses, companies and individuals to go out and take that risk. The third way that we get innovation is to do the things that are currently being done in a more efficient manner. There would be hundreds of thousands of companies out there today, no matter what goods and services they supply, who would have thought: 'What are we doing? How can we do that in a more efficient way?' All of that takes experimentation and risk. We know that most of those experiments to get those new products, to break into those new markets and to work out a way of doing things more efficiently will fail—but there is nothing wrong with that. That is how the history of innovation has always been. All the great inventors did not just sit down and come up with one brilliant idea. For every brilliant idea, they would have had hundreds of ideas that failed.
Most successful entrepreneurs have had many ideas that have failed. In fact, when you look at the tech start-ups in Silicon Valley in the USA, you are not considered experienced unless you have had several companies or several ideas that have failed. That is the type of culture which we need to imbue our society with. We need to engrain it in our schools. We need to engrain this culture of entrepreneurialism and risk-taking, because, at the end of the day, that is the only way that we can get this economy to grow, that we can see jobs created, that we can see more wealth created and, ultimately, that we can give whoever is in power here the resources to fund all of the things that we so desperately want to fund. If we are going to encourage that entrepreneurial culture in our schools, we should be telling the stories of entrepreneurs and their successes, as well as the failures that they have had in the past.
On Friday of last week, I was most fortunate to be invited to an event to celebrate the 100th anniversary of the birth of the creator of the Lamborghini motor car, Ferruccio Lamborghini. His story is one that we should be telling in schools if we are going to encourage an innovative and entrepreneurial culture. Lamborghini, whose background was humble, was born in Italy on 28 April 1916. He survived the Second World War in Europe. He was captured by the British and made a prisoner of war. After the war, he was released. At the end of the Second World War, he noticed that the Americans had left behind an enormous quantity of used military equipment. They had simply dumped it, because it was too expensive for them to ship it back to the states. He saw this surplus, which was for all intents and purposes useless military equipment.
With his engineering background and his entrepreneurial skills, he realised that he could convert that excess military equipment into tractors and use it for agricultural production. So he got some of that old military equipment and converted it into a tractor to use on his farm. Other farmers saw how successful this was and they wanted the same thing. This greatly improved the productivity of his region. It created wealth and prosperity. He went on to build a factory called Lamborghini Tractors, and his tractors were exported throughout the world.
The story goes on. After being successful, he looked for another area to go into. That was in his love of motor cars. The famous story is that he bought a Ferrari for himself, but he thought that the Ferrari motor car was not good enough. He thought he could build a better car. It is said that when he went to Enzo Ferrari he sat down and explained the problems with this car. Enzo Ferrari famously brushed him off. He summed up Lamborghini. The quote attributed to him was him calling out, 'Hey Ferrari. Your cars are rubbish.' So he put his money where his mouth was. He set up a factory to build a car in competition with Ferrari, because he thought he could do it better. That was in 1963. Today, the Lamborghini motor car is one of the most famous and prestigious motor cars in the world. That is the type of story we need to be imbuing in our kids and teaching them at school, rather than some of the other rubbish that we have seen.
The specifics of this bill are simply aimed at encouraging greater start-ups and to encourage venture capitalists to put their money into Australian start-ups. We need that because in Australia we have a corporate tax rate of 30 per cent, and that makes us uncompetitive when we compare that internationally—one of the highest tax rates in the OECD. When we compare it with our near neighbours, across the ditch in New Zealand or in Singapore or in Hong Kong, where the corporate tax rate is 15 and 17 per cent, or even in the UK where they are lowering their corporate tax rate down to 20 per cent, our corporate tax rate at 30 per cent is uncompetitive. As the years go on, the gap between Australia's corporate tax rate and corporate tax rates in the rest of the world will continue to expand, and we are at risk of losing venture capitalists investing in Australia.
This particular bill provides a 20 per cent tax offset of up to $200,000 for investors who invest in what is called early-stage investment companies. There are a few limitations on what classifies an early-stage investment company: they must be less than three years old, they must have income for the current year of less than $200,000 and they must have incurred expenses of less than $1 million in the previous year. Providing that, someone who invest in those companies as a venture capitalist gets a 20 per cent tax offset, plus they get a 10-year exemption on capital gains tax if they keep those shares for 12 months or more. This is an important thing that we need to do.
It was pleasing that we heard support for this bill from the Labor Party. It was pleasing to hear the member for Chifley and the member for Perth come into this chamber and talk about the importance of entrepreneurship, start-up businesses and innovation. Although it is great to have their support on this bill, everything else that we have heard from the Labor Party today has been to the contrary. Everything that they are doing with their pernicious policies is damaging entrepreneurs. It is putting a 'disencouragement' to start-ups, and has an adverse effect.
Just look at negative gearing. You cannot have it both ways. If someone invests in an income-producing asset and they are getting a positive cash flow and they are getting a profit from that, that profit should be taxed, which is simply positive gearing. If that investment is losing money, they should be able to take that loss and offset it against other income. The plans to get rid of negative gearing mean that you cannot take the loss and offset it against other income. This becomes a disincentive for investment and a disincentive for innovation, yet this is exactly what we are seeing proposed.
Then, there is the other plan we hear of about changes and increases to the capital gains tax. This bill provides a 10-year exemption from capital gains tax to someone who holds their shares for 12 months in an eligible early-stage investment company. Yet we are seeing proposals from the Labor Party to increase capital gains tax by 50 per cent in this country, giving us one of the highest rates of capital gains tax anywhere in the world. I think one of the few places where the capital gains tax is higher than what is proposed by the Labor Party is Venezuela. And we have seen what has happened there.
If we are going to encourage start-up businesses in Australia we have to make sure we are giving them low-energy costs, because low-energy costs equal jobs. Low-energy costs encourage investment. But what we are seeing are pernicious policies, put up by the Labor Party, doing exactly the opposite, with their reintroduction of the carbon tax—call it an ETS or whatever you like—which will only push up electricity prices. That becomes a discouragement for investment and innovation in Australia.
We on this side of the chamber understand that the only way we can get more government resources into the education sector, into the health sector and into the disability sector is not through higher taxes or through putting greater penalties on people. Instead, it is to grow the size of the economic pie. It is to create more wealth. It is to free the hands of entrepreneurs in this country to give them the incentive to get out there and to have ago. That is exactly what this bill does.
I commend the Treasurer for his work in putting this bill together, for working with the start-up community and for giving those venture capitalists greater incentive to invest in Australia. Currently, there are many disincentives in this country. One is our high corporate tax rate. The other is the threat and the risk of the Labor Party of Australia ever coming to take these Treasury benches. That is the greatest risk that we have to this country. That is the greatest risk. Anyone who wants to risk their capital has that fear in the back of their mind—should the Labor Party ever sit again on this side of the chamber.
With that, this is a good bill. This bill will encourage entrepreneurs to invest and to take more risks to get more innovation and to grow the economic pie of this country. I commend it to the House.
It is a pleasure to follow my colleague the member for Hughes. This legislation, the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016, is about jobs for the future. It is about the 21st-century economy. It is about ensuring Australia is competitive on a global scale, and that we have a broad base from which to build our national wealth. The Australian economy is fundamentally strong and unemployment is relatively low. The surplus left by the previous coalition government shielded us from the worst effects of the global financial crisis. There is a sense, overall, that the nation is on the right track. But governments should not rest on their laurels—and this government will not.
The Turnbull government wants to ensure that the foundation stones for change are laid now and that the frameworks for business and industry to prosper into the future are put into place now. The successful transition of the Australian economy from the resources-led boom will be fuelled by innovation, investment in a more diverse range of industries and support for businesses to create more jobs. We have announced important building blocks in our economic plan to support this transition, including the innovation and science agenda, which will develop the skills required for the jobs of the future, bring more great Australian ideas to the market and support start-ups.
I see a very different Australia in the next few decades—one still reliant on our natural resources but also more attuned to the needs of the region and beyond. In the same way that the United States' economy has benefited from the genius that is Apple, Microsoft and so on, so too can Australia lead the world in innovation and technology. In the United States, one of the fascinating stories is the rise of Tesla Motors, in part due to its charismatic founder and CEO Elon Musk but also due to the drive for innovation that has been central to its development over the past decade and a half. Tesla first gained the public's interest following the release of the Tesla Roadster, the world's first fully electric sports car around 2008. It was the first electric vehicle to have a range in excess of 300 kilometres between charges, thanks to the innovative lithium battery cells. Between 2008 and 2012, it sold about two and half thousand models. But concurrently with that, in 2009, Tesla released the Model S all-electric sedan. By the end of last year, it had sold 100,000 models worldwide.
In March, the company unveiled the Tesla Model 3, the first vehicle aimed at the mass market. Within weeks, global reservations totalled around 350,000 units, representing a potential sales figure exceeding US$14 billion. For America, the success of Tesla Motors is not just defined by the advance orders. Tesla is one of the new economy industries that has been able to create jobs by the thousands. In December 2012, Tesla employed almost 3,000 staff. Three years later, that figure had increased to more than 13,000—a rise of more than 10,000 jobs in just over three years. Through the drive and determination of the Tesla team and its charismatic driving force of Elon Musk, Tesla has been able to create a low-emissions vehicle that is expected to one day be affordable to the average wage earner. The Model 3 is estimated to cost around $35,000 in US terms, which might still put it out of the reach of some Australian families just at the moment. But, through innovation and development, the organisation has been able to substantially reduce the cost of purchasing a low-emissions vehicle in the United States and elsewhere.
It has not all been smooth sailing with Tesla. There have been some legal issues around copyright and patents that have dragged the company through the courts. Then there was a particularly famous episode of Jeremy Clarkson's Top Gear in which the crew were filmed pushing a Tesla into the garage, presumably after its batteries had run out. But, overall, the company has defied the odds to deliver long-range electric vehicles, which have been promised for years but have, until recently, remained a pipeline dream.
This is what I referred to earlier when I mentioned Australia being more attuned to the needs of the region and beyond. With the many great minds we have at our universities and research institutes across the country, I have no doubt that one of the areas of innovation where Australian will lead the way will be in the development of sustainable technologies and green energies that will meet the demand in the Asia-Pacific region and in the Northern Hemisphere, as well. But, of course, the scope is endless. This legislation that we are discussing today will help facilitate innovation and smart thinking for years and decades to come in this country. In the process, it will mean new jobs, more export dollars and more investment.
So, on to the legislation. The two key headline items from this package of amendments were very appropriately, and I think accurately, summarised in the March edition of Tax Month. Their appraisal focused on the 20 per cent tax offset on investments of up to $200,000 in innovation and the 10-year capital gains tax exemption. The Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 was introduced into the House of Representatives by the Treasurer, Scott Morrison, in March. The bill proposed the following: early stage innovation company amendments to the Income Tax Assessment Act 1997, which are intended to encourage new investment in Australian early stage innovation companies with high growth potential by providing investors, who invest in such companies, with tax incentives.
These amendments form part of the tax incentive for early stage investors. Tax incentives to encourage innovation via these entities include a 20 per cent carry forward non-refundable offset on investment capped at $200,000 per year. The tax offset will be available upon investment, not when the funds are used by the innovation company. There will also be 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 30 per cent interest in the innovation company and that any sale of the shares will be taxed on a deemed capital accounts basis.
To qualify for these incentives, the investments must be in an early stage investment company that is broadly unlisted, is less than three years old, has $220,000 or less assessable income in the previous year and has $1 million or less in total expenses in the previous year. There are no investment limits on sophisticated investors under section 708 of the Corporations Act 2001, except for the $220,000 investment limit for the tax offset. Other investors will have a $50,000 limit. These amendments will apply in relation to shares issued on or after 1 July 2016 or on royal assent.
The Early Stage Venture Capital Limited Partnership, otherwise known as the ESVCLP, and the Venture Capital Limited Partnership, the VCLP, regimes within the Venture Capital Act 2002 and ITAA 1997 will be amended to improve access to venture capital investment and make the regimes more attractive to investors. The amendments provide additional tax incentives for the limited partners in new ESVCLPs, relax restrictions on the ESVCLP investments and fund size, and clarify the legal framework for venture capital investment in Australia. Under the changes there would be: 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, improved access to funding from managed investment trusts and, also, broadening and simplifying rules for both Venture Capital Limited Partnerships and Early Stage Venture Capital Limited Partnerships.
These amendments will broadly apply on and after 1 July 2016; however, the ESVCLP tax offsets will be available for any qualifying contributions made to ESVCLPs that became unconditionally registered on or after 7 December 2015, which was the date that the measure was announced in the Prime Minister's innovation statement. By way of definition, the explanatory memorandum answers the question, 'What is an early stage investment company—or ESIC?' Generally, an Australian incorporated company will qualify as an ESIC if it is at an early stage of its development and it is developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return. The specific objective threshold tests apply to determine if the company is at an early stage of its development, whereas a combination of tests may apply to determine if the company is developing a type of innovation. These different tests recognise that while objective tests are easier to apply in Australia's self-assessment income tax system, companies may be innovating in a variety of different ways and so may need to apply a combination of different tests depending on their circumstances.
A company must pass four tests to satisfy the early stage limb of the qualifying ESIC test. Test 1 is where the company has been recently incorporated or registered in the Australian Business Register, then the company must have been incorporated in Australia within the last three years. If it has not been incorporated within the last three years, then it must have been registered in the Australian Business Register within the last three income years. If it has not been registered in the ABR within the last three income years, then it must have been incorporated in Australia within the last six income years and any wholly-owned subsidiaries must have incurred expenses of no more than $1 million in total across all of the last three income years.
The ATO's company tax return requires companies to report total expenses as part of the total profit-and-loss calculation. A company that has submitted a company tax return in the previous income year must rely on the amount reported in item 6 for the purposes of this test. Alternatively, if the company was not required to submit a company tax return, it may use the amount corresponding to this item. A company that does not meet any of these requirements will not qualify as an ESIC.
I commend the Treasurer on his work in putting this piece of legislation together. As I said at the beginning of my comments, this legislation is all about jobs for the future. It is about the 21st century economy. It is about ensuring Australia is competitive on a global scale. I am really pleased to have been able to speak on it. I commend the bill to the House.
I commend my colleague the member for Solomon on her comments, especially the story of Tesla. I think in Australia we aspire to have more Teslas, more Facebooks, more Apples, more Samsungs and more LGs—these types of world companies that have fantastic technology, fantastic innovation and have used brilliant intellectual property to create wonderful, world-leading products. In Australia, we are not without our great success stories in this space. We think about SEEK, a company that has dominated online recruitment for many, many years now. It has been a world leader, expanding its borders and product diversification. We think about Atlassian, one of the great success stories, listing on the stock exchange in the US and being a leader in its software. We think about other companies, like Freelancer, with niche software. The list goes on.
The challenge for our nation is to have more of these companies, because they provide great jobs and a great future for our nation. This is why the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 is so important. It helps create an entrepreneurial and risk-taking culture, and it inspires innovation. It is this risk-taking and entrepreneurial culture that Australia has not been brilliant at, when we compare ourselves to other countries. If we change our culture for the better, we will have greater economic benefits—more jobs, a better economy and a better future.
The National Innovation and Science Agenda contains complementary initiatives to ensure start-ups and innovation companies are supported at different stages of idea development. It was only just last week that colleagues and I met with a number of start-ups and entrepreneurs from around Australia. We heard similar stories of the challenges they face seeking venture capital, seeking financing and, unfortunately, having to go to the United States or elsewhere for that. That is why these measures are so important. They will help improve investment in early stage innovation companies. They will help entrepreneurs overcome a difficult stage in the financing life cycle, sometimes described as a 'valley of death'. I know from experience in my own state that 'valley of death' has many, many different interpretations; in shipbuilding it has similar connotations of an industry that struggles, but we are fixing that, as we know, through our commitment to Defence shipbuilding. In terms of the valley of death for start-ups, the term applies to an early stage development where they are unable to meet their cash flow requirements.
The tax incentives for early stage investors measure will support investments in these early stages by attracting investors who can offer funding and, importantly, business expertise that will assist with the development and commercialisation of innovative ideas. In Australia we are often very good at the research part of it. Our universities, our research institutions and our companies do some great research. It is that commercialisation element that we struggle with, and that is something that this bill will assist.
In terms of commercialisation, the Venture Capital Act, amended by schedule 2 of this bill, will attract greater levels of investment in growing companies, improving their international competitiveness. The complementary measures provide tax incentives for funding through venture capital limited partnerships, including early stage venture capital limited partnerships to attract investments at the early stage of development. 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 in the technology sector. The measure builds on this momentum, to improve funding for promising projects in industries beyond the technology sector.
In framing this bill, we consulted with a range of stakeholders, from experienced investors to start-up founders and industry bodies, to design these two measures in a way that attracts investment without creating unnecessary regulatory burdens. We are answering the call from industry, and this has been replicated through our focus on innovation since late last year, with the appointment of a cabinet minister for innovation—the Minister for Industry, Innovation and Science—an Assistant Minister for Innovation and a national innovation statement, which has received great acceptance and recognition from broad industry, universities and others. They see it as a massive step in the right direction. You will recall, Mr Deputy Speaker, that we have had other initiatives, whether they be employee share ownership schemes or crowdfunding, with support for greater incentives in those fields to help finance the start-ups and the entrepreneur culture and ecosystem we have in Australia.
In closing, this bill is another practical example of how the Turnbull government is acting to support the transition in our economy from the mining boom to the ideas boom. I commend the bill to the House.
In summing up, firstly, I would like to thank those members who have contributed to this debate.
I am proud to introduce the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016, which amends our taxation laws to implement a range of incentives to drive economic growth and jobs in our transitioning economy. These measures will 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 represent its commitment to making Australia a more modern, dynamic, 21st century economy. These actions also go towards ensuring Australia remains one of the world's leading locations when it comes to doing business.
The National Innovation and Science Agenda contains complementary initiatives to ensure start-ups and innovation companies are supported at different stages of idea development, by aligning our tax system and business laws with a culture of entrepreneurship and innovation. The government is delivering on two commitments that form part of the National Innovation and Science Agenda. The first measure, schedule 1 to this bill, will amend the Income Tax Assessment Act 1997 to improve investment in early stage innovation companies. This will help entrepreneurs overcome a difficult stage in the financing life cycle, sometimes described as 'the valley of death' where many start-ups find themselves unable to meet their cash flow requirements.
The tax incentives for early stage investors measure will support investment in these early stages by attracting investors who can offer funding and business expertise that will assist with the development and commercialisation of innovative ideas. The tax incentives for eligible investors include a 20 per cent carry-forward non-refundable offset on investments capped at $200,000 per year. There will also be a 10-year exemption on capital gains tax for investments held in the form of shares in the early stage innovation company for at least 12 months, provided that the shares held do not constitute more than a 30 per cent interest in the early stage 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. The eligibility criteria will ensure that the incentives are targeted towards companies that need it. For instance, criteria around incorporation, expenditure, assessable income and not being listed on any stock exchange, such as those prescribed under the Corporations Law, help ensure that investments go to start-ups. It is important that the government helps connect entrepreneurs with business expertise so that innovative ideas can reach the market through commercialisation. Innovation in Australia is dynamic. A regulation-making power is also included so the government can keep the measure up to date.
The second measure, schedule 2 of this bill, will amend the Venture Capital Act 2002 and the Income Tax Assessment Act 1997 to reform the arrangements for venture capital investments. This will attract greater levels of investment in growing companies and improve their international competitiveness. The complementary measure provides tax incentives for funding provided through venture capital limited partnerships, including early stage venture capital limited partnerships, to attract investments at the growth stage of development. At this stage entrepreneurs have often received initial funding but 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 in the technology sector. The measure builds on this momentum to improve funding for promising projects in industries beyond the technology sector.
We are introducing new arrangements for venture capital limited partnerships and early stage venture capital limited partnerships. Notably, there will be: 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, improved access to funding from managed investment trusts, and broader and simplified rules for both venture capital limited partnerships and early stage venture capital limited partnerships.
The tax incentives will apply for the 2016-17 income year, once the bill receives royal assent. I can assure the member for Chifley that in framing this bill we consulted widely with a range of stakeholders—from experienced investors to start-up founders and industry bodies—to design these two measures in a way that attracts investment without creating unnecessary regulatory burdens. We are answering the call from industry. We are creating the ecosystem that Australia needs to succeed in the modern world. We are setting up the environment to reward our innovators and our entrepreneurs, who have the concepts and ideas to benefit jobs and growth for 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 to succeed. This is another practical example of how the Turnbull government is acting to support the positive transition in our economy from the mining boom to the ideas boom. I commend the bill to the House.
Question agreed to.
Bill read a second time.