Founders warn of talent exodus despite tax carve-outs
Despite making further concessions to startups from capital gains tax increases in the federal budget, the government has been warned these changes will increase the brain drain of top talent from Australia.
The new regulations will allow “innovative businesses” to continue to benefit from the existing 50 percent capital gains tax deduction, while eligibility for the existing 50 percent active assets deduction for small businesses will also be expanded.
Labour’s May budget replaced the 50 per cent cut with an inflation indexation model and a minimum tax rate of 30 per cent.
While it was sold to make the housing market fairer for first home buyers at the expense of property investors, the changes were extended to all assets, including shares and businesses.
Because startups often have a negligible initial cost base for indexation, the proposed changes would double the maximum effective tax rate on capital gains to about 47 percent, reducing the incentive to take risks and start businesses.
This also makes it difficult for startups to attract talent.
Because they have less capital to spend on salaries than established firms, startups often benefit from elbow grease; They give employees a portion of the work and promise that if the company’s value rises later, they will get a share of the offered payday.
One founder, who asked to remain anonymous to speak freely, said startups in Australia were already playing hard mode.
The flow of young talent in their 20s or 30s to the US will accelerate further, but even the UK and New Zealand are becoming more attractive, he told AAP.
“Every border lab is now full of Australians working in the US,” he said.
“You get paid a lot more, you get taxed less. You get to have a little adventure.”
Consultations are ongoing on how the vote will work.
The final report of the two-day parliamentary inquiry into the tax changes will be published on Friday.
Geoff Wilson, chief investment officer at Wilson Asset Management, said the government’s rush to protect startups was an admission that the original proposal was flawed.
“The fundamental problem remains unchanged,” he said.
“This is still a tax on aspiration, entrepreneurship and productive Australian capital.”
Australian Council of Small Business Organizations chief executive Skye Cappuccio said the regulation was a welcome step in the right direction, but concerns remained about the impact of wider changes on investment, entrepreneurship and productivity.
Shadow treasurer Tim Wilson said the concessions amounted to “polishing the dirt”.
Mr Wilson told the ABC the government was clearly creating a two-tier structure by creating more cuts for small businesses rather than abolishing the tax altogether.
Chartered Accountants ANZ has welcomed the decision to remove the eligibility threshold for the active asset discount.
“These businesses are the lifeblood of our economy and this change will make a real difference,” said Susan Franks, the organization’s tax leader.
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