SMEs set to win in push to scrap capital gains tax for new business investment

The peak association representing Australian small businesses has welcomed a proposal from Coalition backbencher David Coleman to scrap capital gains tax (CGT) on investments in early stage businesses.

Speaking to SmartCompany this morning, Peter Strong, executive director of the Council of Small Business of Australia congratulated the government for looking at how private business investment is taxed.

“I’m glad they’re looking at it,” Strong says.

“Investing in new businesses is a different sort of investment, it’s much more high risk.”

Coleman’s proposal would apply to equity investments in private companies that are less than two years old and with less than $1 million in revenue over the previous 12 months.

The exemption of CGT would apply regardless of the type of investor or the length of time the investment is held for.

According to Coleman, the policy would cost the federal government an estimated $50 million over the next four years, increasing to $30 million annually by 2018-19.

Coleman outlined the proposal in an opinion article in the Australian Financial Review today, arguing reform to CGT would help “create a startup culture”.

Drawing on his own experience of raising capital for one of Australia’s first online retailers, dStore, and his years working in venture capital, Coleman said Australia’s “business culture tends to gravitate towards conformity”.

“We focus on Martin Place and Collins Street, rather than a little office of our own somewhere,” Coleman said.

“But in the past couple of years, there has been a noticeable increase in the awareness of our national need to foster new businesses.”

Coleman said the government has already “demonstrated a strong understanding of what new businesses need”, citing reforms to employee share schemes and the $20,000 asset write-off scheme included in this year’s budget. However, Coleman said more can be done.

“While there are capital gains tax exemptions for small business owners and some venture capitalists in some circumstances, every other startup investor gets hit with a CGT on exit,” Coleman said.

“There is no general CGT incentive to invest in a startup, over a traditional listed company or investment property.

“If it doesn’t work investors will lose their money, if it does work the government will come along and ask for some CGT when you sell your stake.”

“By helping more companies get off the ground through a CGT exemption, we would be sending a very clear message that Australia is open for business.”

According to Fairfax, the government will consider the proposal as part of its ongoing tax reform white paper.

A spokesperson for Treasurer Scott Morrison told Fairfax the government will consider “any proposals that help Australians work, save and invest”.

“The Prime Minister had made it clear that innovation will be a key focus of the government’s policy framework to promote economic growth,” the spokesperson said.

“To be successful we need to provide opportunity for entrepreneurs to help transition the economy from the mining boom and take full advantage of the digital economy and growing middle class in Asia.”

However, COSBOA’s Peter Strong said any new rules around CGT will need to be “water tight” to make sure the policy is not abused by “all the sharks and charlatans”.

Strong says if Morrison and Prime Minister Malcolm Turnbull are serious about encouraging innovation, they will also make sure any change does not bring with it more paperwork for business owners.

“Let’s not make this a red tape problem,” he says.

“Let’s now try to make [startups] behave like big businesses, let’s respond to their behaviour, structures and approaches.”