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AUS: Business tax reforms to foster growth

AUS: Business tax reforms to foster growth and innovation

The Government's business tax reforms announced today include a range of measures which will boost the information technology (IT) sector, foster growth and enhance innovation, the Minister for Communications, Information Technology and the Arts, Senator Richard Alston, said today.

'The reforms will provide Australia with an internationally competitive tax system - and the real potential of our innovative industries, including IT, telecommunications and the internet, will be unleashed,' Senator Alston said.

'Australia's innovative industries have had to endure an uncompetitive tax system for too long. As a result, too often Australia missed out on high value added exports and jobs, ideas were not commercialised, intellectual property left the country, and entrepreneurial activity in the information economy was constrained.

'As a result of the Government's reforms, the nation's innovative industries will now be better placed to attract investment; to grow; and to attract and retain good managers and employees.'

Attracting Investment There is a shortage of start-up and expansion capital (venture capital) in Australia, which has been a major impediment to the growth of innovative start up businesses. The high rate of capital gains tax (CGT), particularly when compared with our international competitors, has been identified as a major cause of this shortage.

The Government's fundamental reforms to the way in which capital gains are taxed will mean that from 1 October 1999 individuals will pay no more than 24.25% and superannuation funds no more than 10% on nominal capital gains - thus making Australia's CGT rate internationally competitive. In a world where investors have many choices about where to put their capital, this is a vital breakthrough.

The Government will also remove another impediment to investment in Australia's innovative industries. The Government's reforms announced today mean that pension funds from designated countries will now be able to invest tax-free in Australia's early and expansion stage venture capital market - matching the treatment they receive at home. Australian superannuation funds will receive a similar benefit in relation to investments made through Pooled Development Funds.

US pension funds are the world's single largest source of venture capital finance. The Government's reforms should encourage their entry into the Australian venture capital market, which will bring substantial additional venture capital and management expertise. Attracting investment from them has been a vital element of the successful IT sector growth strategies of countries like Israel.

Growing Australia's tax system has restricted the growth of start up companies. Such companies often go through several changes of ownership as they grow and refinance - and up until now, they have faced a heavy tax slug each time.

But the reforms announced today will help solve this problem by introducing 'rollover relief', so that no CGT liability will arise where there is an exchange of interests in companies or fixed trusts because of a takeover (subject to certain requirements such as the acquiring entity owning at least 80% of the voting interests of the target entity.) This measure will enable the restructuring of rapidly growing innovative businesses, and means Australian companies will face similar tax treatment to that faced by their US and UK counterparts.

Attracting and retaining employees Many start up companies in the IT, internet and telecommunications fields reward their employees with valuable share options - a form of remuneration which is now mandatory in Silicon Valley, partly because it is easier for a cash-starved start-up to offer options than fat salaries. Yet Australia's uncompetitive taxation regime has impacted adversely on Employee Share Option (ESO) schemes, making it hard for small innovative Australian firms to use these schemes to attract highly skilled employees. In some cases employees who have been issued with options have faced bankruptcy from heavy CGT liabilities when their companies were subject to scrip based takeovers.

The rollover relief provisions announced today, however, will finally allow Australian firms to compete with those in the rest of the world, by making it much easier and less risky to issue attractive options packages to their employees. And the reduction in the effective CGT rate will make options schemes more attractive - and thus more competitive with what is on offer in other countries.

These reforms to the tax system mean that the shackles have come off Australia's IT, internet and communications sector. This is a significant breakthrough for the sector and for the nation.

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