High net worth individuals who invest in seed or “angel” rounds are typically called Angel Investors as they provide advice, connections and other resources in addition to their capital investment. Currently there is no incentive for angels to deploy their capital in to this asset class, and there is no mechanism to support them should the startup fail.
In the UK, the Enterprise Investment Scheme provides a 30% tax offset of Angel investment in early stage venture and provides the remaining 70% as a tax deduction should the venture fail. This is one of the leading contributors to the increase in angel investment in the UK. In Israel, the Chief Scientist has tabled a 100% tax offset for Angel investment with no ceiling on investment.

user picture Sebastien Eckersley-Maslin · 2 years ago · 115 votes · 21 comments
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Sebastien, a key point here is that if this incentive attracts new investors we need to educate them. Startup investing is very different to property, tradable equities, etc. If we can get this policy up, it should be paired with some efforts to run investor masterclasses, etc. I am also a big believer in new players initially co-investing with established investors and maybe angel groups can play a bigger role there than they currently do.
Craig Davis · 2 years ago
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UK system is sensible and should be adopted in Australia to allow innovation and manufacturing to continue in Australia.
Jeetu Nair · 2 years ago
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An incentive is desirable, because there is usually incomplete information on an investee's prospects and because of the high impact of technology ventures on growth. However, angel investments should not be completely risk-free and angels should be encouraged to undertake due diligence. Suggest a 50% offset up front, but no further deduction if the venture fails. We want informed investment decisions, not volume
Patrick Mooney · 2 years ago
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Yes Pat! A partial offset can *reduce* the risk on a very high risk class, but of course should not eliminate risk and the need for investors to evaluate startups and preferably add value through advice and connections.
Craig Davis · 2 years ago
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One way to balance this is to make the tax incentive a timing difference. For example, enable a tax deduction (say 20% pa for 5 years) but have this returned as part of any gain on profits in the future so when you sell and get your principal investment back you pay back the tax deduction component. This then becomes self funding over the long term in notional terms. So long as overall tax rates are reasonable, people don't have a problem paying tax on profits (or at least they shouldn't).
Adrian Bunter · 2 years ago
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Whilst most investors would love a tax rebate or deduction for making an investment it is more likely to result in unintended consequences. The expectation of making a gain on your investment should be incentive enough. If you lose you get a capital loss.
Adrian Bunter · 2 years ago
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I think this is a matter of timing, rather than an additional write off (as you have suggested in your comment a little later). If a property investor can negatively gear that loss immediately against income, why not do something similar for startup investment? It's a helluva lot more risky than property, yet any eventual loss must be offset against a gain rather than against income.
Simon Foster · 2 years ago
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Simon - an early stage investor can negatively gear angel investments to same way they can property so long as they have reasonable expectation of investment and plan to hold it. The proposal (and UK scheme) provide an upfront deduction/benefit for the capital cost. This would be the same as a property investor receiving a significant upfront benefit for the original capital acquisition of the property. The increased risk on angel investment versus property investment is compensated by higher returns (or at least investors require higher return for risking their capital). I can fully support shifting the timing of tax to provide incentives and to change behaviour. Ultimately one of the biggest problems for governments is that they generally only really assess things over a 4 year term. Very few governments have enough vision to make changes that have truly long term benefits that may come at some short term cost.
Adrian Bunter · 2 years ago
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Adrian, the opportunity here is to slightly shift the incentive so we can bring in new money and investors. There is an enormous pool of money in property and shifting a small fraction to funding innovative new businesses would be a great outcome.
Craig Davis · 2 years ago
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Craig - totally agree - but if we can do it in a revenue neutral way then it is likely to get more support. Asking for large costs to the tax base won't win supporters. Using negative gearing as an argument doesn't work as it is comparing apples and oranges - that was more point. Hence my suggestion to use it as a timing difference. People will invest to get a tax deduction even if they have to pay it back later when they make a profit. That was the premise of tree plantation investments. That is a better reference point.
Adrian Bunter · 2 years ago
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The risk associated with startups and new technologies make it a less attractive option for investors than traditional investments (which don't progress our nation's innovation capability). This would be a smart mechanism for rewarding early stage investors who assume the risk to invest in untested but potentially game-changing ideas and technologies. It might just do the trick to change Australia's investment risk profile and promote a culture of innovation.
Colette Grgic · 2 years ago
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The UK system is one that Australia should embrace. The private sector are the ones best placed to allocate capital and an upfront tax offset is the best way to ensure capital is allocated to startups.
Stuart Snyder · 2 years ago
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Great suggestion Seb, the EIS and SEIS in the UK have been huge drivers of early stage capital (over 21,000 companies have received investment through the scheme). Up front tax incentives are always going to drive more action than future capital gains discounts... negative gearing with respect to investment property an example of this.
Toby Heap · 2 years ago
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This could encourage not only new Australian Angel investors but also attract successful overseas entrepreneurs keen to come back to Australia to grow our ecosystem - especially when combined with CGT changes
Sarah Pearson · 2 years ago
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This will be the single biggest incentive to free capital up. It is an easy announcement, can be effective almost straight away and would be easy to administer. It doesn't need a budget to announce, it can make a difference almost immediately with minimal legislative changes, probably 2 or 3 sections in the tax act. This would also encourage superannuation funds to invest their large wealth into the sector. The flow on effect is there is more income in the sector, more university enrollments and then more ssecondary students demand these subjects at school. There is an immediate effect, but also a significant flow on down the economy and into the future.
Tas Tudor · 2 years ago
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