Questions raised about Turnbull's start-up utopia
In the wash-up from Malcolm Turnbull’s leadership coup in September, the new prime minister’s first item was to breathe life into the concept that has defined his public persona for decades: innovation.
A brief vision statement accompanied by flashy websites and the promise of new tax breaks was heralded as a red letter day for Australia’s budding entrepreneurs and the deep pockets prepared to back them.
But six months into Turnbull’s reign – and a $28 million ad campaign later – there is still some detail lacking about what exactly an “ideas boom” will entail, and economists have begun to question how new measures will actually drive innovation.
The $1.1 billion National Innovation and Science Agenda (NISA), announced in December, has been sold as Australia’s road map to economic growth in the wake of the mining downturn and the collapse of the manufacturing industry.
At the heart of the package are tax breaks for start-up investors designed to create a culture of risk-taking similar to that found in Silicon Valley or Singapore.
The minister for industry, innovation and science, Christopher Pyne, describes these measures as creating a much-needed “cultural shift” in the economy.
As well as tax breaks for start-up investors, the package includes a new $200 million CSIRO Innovation Fund to support investments in start-ups, and US-style changes to bankruptcy laws that will allow businesses to trade while insolvent and cut the period in which bankrupts cannot run other businesses to just one year.
The measures have been seen as a welcome step by industry groups, who say tax breaks could also be expanded to include mum and dad investors.
“It would be great to apply that to retail investors. A lot more people will go into early-stage business,” David Jackson, board member of venture capitalist group Sydney Angels and chief executive of small business lender FundX, says.
But weeks into what can only be described as a furtive election campaign, the flagship policy is proving underwhelming with analysts.
In a poll by the Economic Society of Australia and Monash University Business School in February, almost half of economists surveyed said tax breaks for start-up investors would be inefficient at best, and at worst create a new tax loophole ripe for exploitation.
“What will happen is that high income earners will essentially find a way to have something that is in fact fairly low-risk, and we are giving them a tax break on that for 10 years,” John Daley, chief executive of economic think-tank the Grattan Institute, says.
“It is an accountant’s honey pot.”
Under the tax incentive scheme, investors will be able to get a 20 per cent tax offset of up to $200,000 a year and capital gains tax exemptions for 10 years.
Mr Daley says the tax break scheme risked being ineffective if the definition of “innovative start-up” was too narrow, and exploited if the definition was too wide.
He says it also raised questions about fairness, given it will only be available to wealthy investors.
“It’s not just rich venture capitalists who will benefit, it’s rich people in general, because the precise thing people will do is take an investment they were going to make anyway and have it classified as an ‘innovation investment’,” he says.
The innovation package has been partially endorsed by Labor and the Greens, who have welcomed moves to boost science and technology in the wake of savage cuts under the Abbott government.
Labor has promised an upfront 50 per cent income tax deduction for investments up to a maximum of $200,000 per year. It has also offered full capital gains tax exemption for equity held in a start-up venture for more than three years.
While the Greens are supportive of tax breaks to encourage innovation, they say the government is too focused on start-ups.
“A lot of innovation isn’t done by start-ups. Start-ups have a crucial role and it’s good that they’re now getting support from the government. But a lot of innovation is done by existing companies,” Greens MP Adam Bandt says.
So far the government has been focusing on innovation in Australia’s untapped tech sector.
Turnbull, a former venture capitalist, wants to encourage people to take more risks, and for companies and individuals be allowed to fail.
This has led to a focus on the tech sector, known for its high-risk, high-reward culture.
The success of Australia’s homegrown start-up business, Atlassian, has helped drive this focus.
Atlassian made global headlines in December when it floated on the Nasdaq for $8 billion, putting its two Sydney founders at the centre of the government’s “ideas” debate.
But Gigi Foster, an associate professor of economics at the University of New South Wales, says while developments in digital technology were important, they were a small part of the economy.
“There can sometimes be an over-emphasis on digital tech. It sounds sexy but actually there are other things.”
She says historically ideas have been driven from outside of the private tech sector.
“We need innovations in health badly – are they going to come from mobile banking technology? I doubt it.”
Economist Stephen King says innovation needs to capitalise on the existing Australian economy.
“Driverless cars are all the rage in Silicon Valley … it is not particularly an Australian issue. But a huge benefit would be long-range, high-speed, driverless truck convoys,” he says.
“It’s about thinking where we can directly address Australian issues, and how can the government help private industry to trial that technology here. And that may not involve a lot of money.”
The former head of the now-defunct national technology research lab NICTA, Hugh Durrant-Whyte, says innovation needs real investment in real people.
He says any initiative will have to be sold in the face of recent cuts to the CSIRO.
“My version of innovation is doing good science. It is not investing in ongoing revenue generation.”
Durrant-Whyte resigned from NICTA over differences of opinion with the board following funding cuts to the body under Tony Abbott. The lab has now been rolled into CSIRO.
“In Australia, what we really struggle with is not start-ups but converting start-ups into big business.
“Too many of them are trying to get in and get out as quickly as possible.
“There’s money to be invested in Australia. So I don’t think adding to that pool is particularly helpful.”
Mr Pyne failed to respond directly to questions about the policy. He said at the release of the package that innovation and science were “two sides of the same coin”.
“This agenda will bring them both together: driving jobs, growth and investment and igniting a national ‘can-do’ attitude.”
Labor says it supports the policy but believes the government should have brought forward the start date for the angel investor measures to support start-ups now.
“We’re currently reviewing the bill and will be issuing our formal position shortly,” Labor MP Ed Husic says.