Great post Rayn, particularly your proposed changes to make the incentives even more effective. Just one tweak from me though: most of your “Bill” examples assumes Bill and his friends want to be come dedicated tech investors, when that’s rarely the case. Many investors are comparing different investment options against each other, they don’t particularly want to be Fred Wilson, they just want to earn a bit of money.
Here’s what I mean. Travel into the near future with me:
The merchant bank Ted works for just paid him a great big $250,000 bonus at the end of the 2016 calendar year. Happy Christmas Ted! After spending some of it celebrating, Ted’s still got to pay income tax on his bonus at the highest marginal tax rate unless he can find something else to do with it before June 30 2017.
He doesn’t have a lot of time to learn about a new industry or find a Rayn Ong to follow his every step, and an ESVCLP can’t help him. Knowing he’s got to pay the ATO all that money is burning a hole in his pocket.
Thirty years ago, a previous federal government was keen to foster the growth of the local film and TV industry, and windfall investors like Ted got a 100% income tax deduction (for a while, even 105%) for backing the media industry’s equivalent of seed investments – pilot stage TV and film projects. It worked – investors like Ted poured millions into film and TV and although plenty of terrible and ultimately unsuccessful projects got funded, so did many very successful projects, and that growth created the careers of many industry professionals who went on to win Oscars and
Same thing happened with the primary production support programs in the 1980s and ‘90s. One hundred percent income tax deductions saw millions invested in avocado, grape, olive and pine plantation projects from people who never wanted to be expert agribusiness investors, much less farmers, they just wanted to pay less tax on the windfall income they’d received as the result of bonuses, rental income, home sales, etc.
Clearly, Bill’s a smart guy; he’s doing his homework, checking it twice, he knows which investments are naughty or nice. But Ted and the vast majority of personal investors out there aren’t, and never will be.
They buy and sell shares without really understanding how the share market works, they put money into investment property because all their friends are doing it, or because they read in the newspaper that it was a smart move, and they spend billions every year on lottery tickets and sports gambling, even when they almost certainly have enough of a rudimentary understanding of probability math to know they’ll lose all their money if they keep gambling for long enough.
Some investors are as smart as Bill, but you can’t hope to significantly change the rate at which Australia creates new Bills within one or even three parliamentary terms.
Bills are mostly created by younger Bills going through most or all of the tech startup journey successfully and then deciding they’ve learned enough to risk some of their capital in the next Gen of startups. Tax incentives don’t really change the number of Bills (though if you give Bill a $40k income tax deduction you are more likely to see that $40k invested in another startup than a racehorse or property trust).
What you CAN do if you’re a federal government though, is motivate a lot of Teds to NOT invest their bonus in a property or race horse or a painting or a classic car and instead encourage them to invest in an early-stage tech startup. By offering them what might look like a pretty attractive tax deduction.
Not because you expect them to become full-time tech investors, or even good at investing in tech, but just because if enough Teds invest enough money in tech startups in the next decade, even if a lot of it never returns anything other than a loss, some of it will be successful.
The 80's-90's tax incentives in primary industry created hundreds of very successful, valuable Australian wine brands. The media industry tax incentives of the 70's-80's created the careers of some of the world’s best industry professionals, like Dean Semmler, Reg Grundy and Fred Schepsi. It also funded the most successful Australian movie in history (Crocodile Dundee) amongst others.
Ted doesn’t know a good tech investment from a bad one and likely never will. He doesn’t know who Fred Wilson or Chris Sacca are, and probably doesn’t care, he’s just looking to do something with his windfall that will save as much of it as possible from the tax man.