By Cliona O’Dowd
Leading investors have hit out at looming capital gains tax changes and demanded the federal government protect access to capital for Australia’s start-ups.
The Albanese government is expected to announce sweeping tax reforms on investments when it hands down the federal budget on Tuesday, including abolishing the 50 per cent discount on capital gains in favour of one indexed to inflation.
The government’s reasoning for the looming changes is expected to centre around growing intergenerational inequity, but investors say the reforms penalise the nation’s start-up scene.
“Any changes to capital gains tax settings should be carefully assessed for their broader impact on investment behaviour, particularly in sectors like venture capital and start-ups where Australia is competing globally for capital, talent and innovation,” Hostplus chief executive David Elia told The Australian.
“There is a legitimate policy question around ensuring tax settings do not unintentionally discourage investment into emerging Australian companies or contribute to capital flowing offshore,” he warned.
Hostplus, the $140bn super fund for the hospitality industry, is one of Australia’s largest investors in venture capital.
“Maintaining a competitive environment for innovation investment is important if Australia wants to build sovereign capability and support the next generation of high growth businesses,” Mr Elia said.
Outspoken fund manager Geoff Wilson railed at the leaked CGT changes, warning they would become “one of the biggest anti-aspiration economic reforms Australia had seen in decades”.
“Start-ups and venture capital run on the willingness of people to take enormous long-term risks in the hope of building something valuable,” he said. “If you dramatically reduce the reward for that risk, capital, founders and talent will simply move offshore.
“A young Australian entrepreneur today can choose where to incorporate, where to raise capital and where to live. This is not about intergenerational equity. It is about whether Australia wants to remain a country that backs innovation, productivity and business creation.”
The changes would only push more capital into passive assets and offshore markets “at precisely the time Australia desperately needs more investment in productive businesses, technology and growth,” Mr Wilson warned.
“You cannot tax your way to a more innovative economy. You have to incentivise people to take risks, build companies and create jobs here in Australia.”
The treasurer and prime minister Anthony Albanese have refused to confirm the details of the changes coming for the CGT discount and negative gearing in property, with Dr Chalmers telling Sky News on Sunday he would not pre-empt the announcements to be made on Tuesday night, even as he indicated tax reform will feature in the budget.
“I think it’s really clear to a lot of Australians that the housing market and the tax system are making it harder for people, particularly for younger people,” he said.
Mr Wilson urged the government to put in place a carve out from the changes to incentivise investment in Australian companies. “If you are an Australian tax resident investing in an Australian company, you should still be eligible for the 50 per cent CGT relief,” he said.
“The risk with these broader CGT changes is that they unintentionally push capital offshore at precisely the time Australia needs more investment in productive businesses, innovation and productivity growth.”
Guy Hedley, a former head of Macquarie Bank’s private bank, who has since co-founded VC firm Stoic VC, said start-up founders and employees would take the hit too.
“Employee share ownership in start ups is an important ingredient to attract talent versus cash. If you reduce the attractiveness of equity then you must increase the amount of cash paid to employees to attract the same level of talent,” he cautioned.
Carving out venture capital from the tax reforms would be extremely difficult, he said.
But there may also be a drive to invest in early-stage VC if the tax reforms go ahead, he added.
This is due to tax benefits already in place for this segment of the market.
“Early-stage VC limited partnerships will become more attractive for investors (if the changes go ahead) because they already have a 100 per cent tax carve out,” Mr Hedley said. “So you’ll end up with this situation where VC funds all of a sudden become the only way you can get tax-free capital gains and tax-free income,” he said.
This benefit would not apply to founders, start-up employees, or capital raising initiatives, but only to investors in these companies coming in through VC limited partnerships.
For start-ups, it will be harder for founders to dish out equity as a solution to attract talent, Mr Hedley cautioned.
Yasser El-Ansary, the former CEO of Australian Investment Council, the peak body for private capital, said any changes must be grandfathered to provide certainty to investors.
“The most important thing that patient capital investors look for, whether it’s early stage start-ups or more mature businesses, is stability and certainty.
“You’re looking to invest your capital for many years, in some cases decades, and you’re making decisions based on the arrangements that are in place today. If those arrangements change after you invest, that creates a great deal of nervousness for investors,” he said.
The government has not confirmed if any changes will be grandfathered but leaks suggest there may be a hybrid or transitional grandfathering, whereby gains made after the May 12 budget would be subject to the inflation indexation model expected to come in this week.
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