Start-up carve-outs bring complexity, uncertainty, submissions say

"CPA Australia supports a targeted CGT concession for early investment in innovative start-ups, and we commend Treasury for consulting openly on its design," CPA Australia tax lead Jenny Wong said in a statement.

However, while CPA Australia has welcomed the CGT concession for investors in Australian start-ups, its capacity to support innovation in Australia remains a concern.

“It's all well and good to say ‘we have a tax break’ and [having it look] generous on paper, but the other thing is, can you apply it in practice [and] is there enough certainty around that?” Wong said.

In a submission to the IBCC by Wilson Asset Management, the firm said that the nation’s “central economic challenge” is productivity. 

“Tax reform should be judged by one question: does it direct capital towards building new productive capacity?”

In the paper, the firm called for retaining the 50 per cent CGT discount for “all productive Australian assets”, arguing that residential assets should be treated separately.

“The new system of indexation and a 30 per cent minimum tax falls hardest on fast -growing assets that start from a low or zero cost base, producing very high effective tax rates and discouraging exactly the risk - taking investment Australia needs most,” the submission added.

“[These changes replace] a long-standing and well-understood 50 per cent discount with a complex, conditional, time-limited and capped substitute available to a favoured few. Every additional condition is another point of uncertainty and another reason for capital and investors to look elsewhere,” Wilson Asset Management said.

This echoes comments from Institute of Public Accountants senior tax adviser Tony Greco, who labelled the IBCC's indexation model “totally inadequate” for risk-taking.

CPA Australia also pushed for change in its submission to the IBCC. The accounting body said that the concession must be “accessible, commercially workable and provide certainty for investors, employees and founders.”

The professional body’s tax lead said the proposals were not well thought out. 

“[The IBCC] can penalise the incentive to invest in high-growth assets because [you] no longer have that 50 per cent concession anymore, and it is really important… to provide a well-targeted carve-out or incentive [for] investment into innovation companies. I think Australia genuinely needs it,” Wong said.

“There are too many barriers for [the] entry point into getting this concession,” Wong said. 

In its submissions, CPA Australia proposed that the five-year holding requirement for start-up investments be replaced with a graduated discount as seen in the recent US Qualified Small Business Stock reform.

The body’s model for this graduated scheme was outlined as 50 per cent exclusion at three years, 75 per cent at four years, and 100 per cent at five years.

In addition, Wong said that employees participating in start-up employee share schemes must be protected from losing their IBCC. “I think employees shouldn't have to lose their access to concessions simply because a company gets successful,” she said.

While Wilson Asset Management said that it welcomed the IBCC’s acknowledgement that the broader CGT changes are flawed, it stressed that tax reform must support risk-taking activity.

“When you tax the returns on risk -bearing capital more heavily, fewer people take risks. The long-term losers are not existing wealth holders, but the next generation of founders, investors and everyday Australians trying to build a better financial future,” the firm said.