The government has dropped the ball when it comes to supporting the Australian fintech ecosystem, says Dirk Steller, founder of VC firm Seed Space.
Australia recently ranked 6th in the world in the 2021 Global Fintech Rankings, a testament to the creativity and entrepreneurship of the local industry. This success however, has come despite, rather than as a result of, Government support for tech generally and fintech in particular. If Australia is to reach its potential, there is much to be done.
A taxing issue
Australia has a reputation as a high-tax country, and this is true for both domestic and foreign investors in the tech scene. Few tax incentives exist for investors – the highest tax benefit on offer through a VC fund structure is a 10% tax offset.
This is a poor cousin to the offsets available to tech investors in the UK and elsewhere, which are up to five times higher and free from capital gains tax. Where capital gains incentives for investors are available in Australia, the way they are capped discourages venture capital investment even further.
For Australian tech founders, the price of success is high. Compared to other fintech markets, founders pay far more capital gains tax – they may even end up paying more tax than their passive investors. This is a huge incentive for founders to take their companies rapidly offshore to places where taxes are lower, or incentives exist to support entrepreneurs to create financially successful businesses.
A strange quirk in Australian investment rules has led to a situation, unique in the developed world, where venture capitalists are not allowed to invest in fintech. An ill-conceived and poorly worded section in the legislation governing approved venture capital vehicles (which must be used to gain the minimal tax incentives on offer) prohibits investment in companies involved in banking, insurance and providing capital to others.
This effective ban on VC investment in fintech is reflected in the paltry support for early-stage fintech companies in Australia – 25 times less than the UK and 26 times less than Israel as a proportion of GDP. And the pool is shrinking – early-stage VC investment in the sector fell by more than 2% last year. This poor outcome will continue to compound until the nonsensical ban is removed.
The ban has a more subtle unintended consequence as well. Because VCs are unable to invest in fintech, the main source of capital has become the investment arms of domestic banks and financial institutions. It’s easy to see how, when fintechs become challengers, the conflicts inherent in this model serve to further erode the potential for fintech success in the Australian market.
A sovereign concern
One of the key commonalities between all successful fintech markets is the engagement with the local sovereign wealth fund. In every country – except Australia – these funds are mandated to invest in their own fintech ecosystems, providing a strong backbone of support as well as, in most cases, healthy returns for the fund.
Not the Future Fund however. It allocates capital to 14 external funds, all of which are outside Australia, and none of which invest in Australian tech or fintech. Not only does this impoverish the sector, it also leaves significant potential returns on the table.
Australia boasts a world-class education system, great infrastructure and, of course, an enviable lifestyle. It is this last point that keeps Australian entrepreneurs at home despite the legislative odds being stacked against them.
If the Government really wants to build an attractive environment for new tech and fintech businesses, it can do so relatively easily. It remains to be seen whether the political rhetoric of the last two years will turn into anything more.
Dirk Steller is the founder of early-stage venture capital fund Seed Space, which has two funds in Australia, and will open an European fund later this year.