The case for retaining capital gains tax concessions

By Adrian Herbert*

Tax settings have contributed significantly to the development of successful venture capital-backed businesses, Australian Investment Council chief executive Navleen Prasad has told the Senate’s inquiry into proposed changes to the capital gains tax (CGT) regime.

Australian businesses such as sustainable packaging producer BioPak, mobile phone mount manufacturer Quad Lock and artificial heart development company BiVACOR had all relied upon the current CGT concessions on investments in small businesses in their development, Prasad said in opening comments before answering questions from Senators on 16 June.

The peak body for private capital investors agreed that tax settings were a legitimate lever for government to use to increase the supply and affordability of housing, Prasad said, but Australia’s economy was not growing at the rate needed to sustain current living standards.

“Just six months ago, the Productivity Commission stated: ‘the most important driver of productivity is new ideas’ and ‘investment – both public and private – fuels innovation and growth’,” she said.

At the heart of those two statements was the concept of productive risk, a third type of earnings in addition to personal exertion and asset ownership, Prasad argued. Productive risk had been “somewhat overlooked” in framing the CGT changes. Productive risk, she said, required ideas, talent and capital. If any of these three legs of a stool were absent a concept would fall over.

Two issues threatened to sweep away those legs:

First, a zero or low cost-base was essential for both technology and non-technology businesses. Indexation was of no benefit as indexing a zero-cost base would result in a zero concession, therefore businesses with zero or low-cost bases would be treated punitively compared with those with higher cost bases.

Second, Australia’s competitiveness relative to peer countries needed to be at least maintained. Under the proposed changes, CGT rates for small businesses would be between 30% and 47%, about twice the rates in the US and the UK. These relativities will matter. As a mid-size economy, Australia does not set global markets, but we do compete against larger G7 economies for capital and talent.

The impact of these weaknesses and the role of tax settings should not be underestimated in a world in which capital and ideas are mobile and talent can choose where to locate.

Canada recognised this last year when it cancelled a proposed increase in the capital gains inclusion rate.

In Australia, the CGT discount has underpinned venture and growth capital policies over the last 20 years, supported by Labor and Coalition governments. The venture capital limited partnership (VCLP) and early-stage venture capital limited partnership (ESVCLP) programs have, since inception, channeled more than $36 billion of investment into business development.

Prasad was joined in appearing before the Senate committee by AIC board member Jenny Wheatley, the chief executive of the Cambooya Ltd, the family office of the Vincent Fairfax and J.B. Fairfax family office.

They answered questions alongside representatives of the Tech Council of Australia and AusBiotech.

Handing down the federal Budget in May, Treasurer Jim Chalmers said he would consult with stakeholders about exemptions for start-up and early-stage technology businesses given their low or zero cost bases would mean they would be disproportionately affected by proposed CGT changes. Chalmers initially said exemptions would take months to work out and would be included in a second tranche of legislation to be presented to Parliament later this year. More recent comments from Prime Minister Anthony Albanese, however, suggest the government may make earlier adjustments in response to continuing criticism.

Image: Treasurer Jim Chalmers. 

*Adrian Herbert is managing editor of Australian Private Equity & Venture Capital Journal