Recently, we had the opportunity to engage in a round table discussion with Australian founders of fast-growing companies on the important topic of strong and sustainable business growth. We reached a unanimous consensus that founders are instrumental to a country's economic and social success. These visionaries harness their drive and determination to transform innovative ideas into reality. Indeed, Australian founders frequently find that their hard work and dedication are met with substantial obstacles regarding tax breaks, investment opportunities, and incentives for skill development and growth. This discrepancy becomes especially apparent when juxtaposed with the support provided to their counterparts in the United States.
Many Australian founders end up relocating to countries like the US, UK, Cyprus, Estonia, and Singapore, who offer more attractive and favourable tax rates, superior grant opportunities, and stronger support from the investment community. For instance, a small but growing business in Australia is subjected to a tax rate of 25%. If a founder generates $100,000 in revenue, $25,000, which could have been reinvested in the business to spur further economic growth and innovation, is instead taxed away, it is even more if they are not a company.. This significant financial burden stifles the founder's ability to reinvest in their business, hindering the growth of its people and diminishing Australia's potential and ability to retain innovation in Australia. In Australia there is not only the company tax that needs to be paid, but also income, payroll and goods and services tax.
We must address these disparities to foster a thriving entrepreneurial and business owner ecosystem that can contribute robustly to Australia’s prosperity. Of the 2.6 million businesses in Australia, 97 per cent are defined by the Australian Bureau of Statistics (ABS) as ‘small’ businesses (less than 20 employees), with a further 2 percent of firms classified as ‘medium-sized’ (between 20 and 200 employees). 61.2% of small businesses are self employed, and 27.2% employ 1-4 people. Those employing between 5-19 people represent 8.9% of small businesses.
Although SMEs represent two-thirds of private sector employment, they also constitute just under 60 per cent of company profits. Beyond these statistics, SMEs demonstrate an unparalleled agility in developing products, technology, and processes compared to their larger counterparts. Additionally, they play a vital role in fostering vibrant local communities through their meaningful contributions.
The Current Scenario: A 25% Tax Burden
Australia's tax system presents unique challenges, particularly for small business founders. Unlike larger companies that leverage tax efficiency strategies through complex structures, small and fast-growing businesses with earnings between $100,000 to $7 million lack this advantage. The existing corporate tax rate of 25% presents a substantial financial challenge for these entrepreneurs, particularly when their expenses are primarily allocated to labour, insurance and development.
This rate restricts their ability to reinvest profits into essential growth and development initiatives. While intended to enhance competitiveness, the tax burden is disproportionately heavy for businesses in their first five years of growth, where every dollar is crucial for survival and expansion.
It is essential to clarify that these considerations are directed towards founders and business owners aiming to pioneer innovative services or products, positioning themselves as potential global players. This distinction excludes small business owners primarily focused on traditional business practices. For founders to qualify, they must meet specific criteria and demonstrate their commitment to innovation and growth.
How Other Countries Do It
In Australia, the spotlight often shines on the startup or business itself, overshadowing the individuals who muster the courage to build a business from the ground up and nurture it to fruition. These entrepreneurs not only create value but also enhance the lives of their employees and contribute to the multiplier effect within the economy. In contrast, numerous countries acknowledge the pivotal role of founders and entrepreneurs, offering diverse support structures and incentives to foster their growth. Here are several notable examples from around the world:
1. United States
In the U.S., founders benefit from a highly developed ecosystem that supports startups across multiple stages. This includes:
Venture Capital and Angel Investment: The U.S. has a mature venture capital market with numerous investors willing to take risks on founders that include intensive programs. Notably, individuals like Peter Thiel, the co-founder of PayPal, are championing the cause by providing substantial support. Thiel, for instance, is known for his initiative of offering $100,000 to 20 or more young entrepreneurs to kickstart their own ventures.
Incubators and Accelerators: Programs like Y Combinator, Techstars, and 500 Startups provide mentoring, funding, and networking opportunities. For instance, a founder would gain access to an industry expert, meeting with them weekly over a period of six months to a year, dedicating four hours each session to discuss challenges, explore opportunities, and address various business-related queries to propel their venture forward. These invaluable opportunities are not exclusive to startup founders but also extend to small business owners who, despite generating revenue, often find themselves stagnating in terms of growth and skills requirements.
Government Grants and Funds: Initiatives such as the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs offer government-backed funding that does not require giving up founder equity.
Tax Incentives: Specific states offer tax credits and exemptions to support startups, particularly in the tech and biotech sectors.
2. Singapore
Singapore is renowned for its founder-friendly policies, including:
Government Funding and Support: Programs like Startup SG Founder provide mentorship and seed money to first-time entrepreneurs.
Tax Exemptions: New startups enjoy significant tax exemptions on initial profits, reducing the financial burden as they grow.
Ease of Doing Business: Singapore offers one of the simplest processes for registering and managing new businesses, reducing administrative overhead for founders.
3. Estonia
Estonia stands out for its digital and startup-friendly environment:
E-Residency: Estonia offers a digital residency that allows global entrepreneurs to start and manage a business online from anywhere in the world.
Startup Grants and Loans: Startups can access a range of supports, including grants for product development and loans with favorable terms.
Innovative Legal Framework: Estonia’s laws around digital business are some of the most advanced, facilitating things like digital signing and remote management.
Potential Tax Reforms and Growth Incentives
To bolster support for small business founders in Australia, a reevaluation of current tax structures coupled with the introduction of growth incentives could prove highly beneficial. Adjusting the corporate tax rate through a tiered system dependent on revenue would significantly alleviate the financial pressures on new and established small businesses by reducing their tax burdens. This would allow these businesses to retain more capital, which could then be reinvested into essential working capital, business operations and growth initiatives.
Furthermore, the implementation of a Growth Incentive Plan could serve as a catalyst for business expansion and sustainability. This plan would offer tax rebates, credits or deductions contingent upon achieving specific growth milestones, such as increases in revenue, the acquisition of new customers, or expansion into new markets. Such incentives would not only provide immediate financial relief but also promote ongoing business development and sustainable practices, fostering a healthier economic environment for small business founders.
In addition to fostering a more favourable environment for founders and small business owners, these potential tax reforms and growth incentives could also yield significant benefits for the government and the broader economy. The government stands to enhance economic productivity and competitiveness on both domestic and international fronts. Increased business activity spurred by these initiatives could result in higher employment rates, as small businesses are often significant contributors to job creation. Moreover, a thriving small business sector could lead to greater tax revenue for the government over the long term, as successful businesses generate higher taxable income.
The Funding Landscape for Small Businesses
Unlike startups which often attract venture capital or angel investors due to their scalability and high-growth potential, small businesses typically rely on more traditional forms of funding. These can include loans from financial institutions, grants from government bodies, and funding from personal networks. However, securing these funds can be daunting due to stringent lending criteria and a competitive grant environment.
To enhance your chances of securing funding for your small business, consider adopting several strategic approaches. First, ensure you have a detailed business plan that clearly outlines your market, revenue model, and growth strategies. Financial institutions and grant committees are more likely to support a business that demonstrates a solid understanding of its market and a robust plan. Additionally, maintaining a strong personal and business credit score is crucial, as it can significantly improve your loan eligibility.
Make sure to manage your financial obligations efficiently and keep up with debt repayments. Exploring alternative lending options is also beneficial. Look beyond traditional banks to credit unions, online lenders, and crowdfunding platforms, which may offer more favorable terms or be more receptive to your business proposal. Finally, actively seek out government and community grants available for small businesses. These grants not only provide essential funding but also offer networking and mentorship opportunities that can be invaluable for business growth and development.
Building a Founder Support Ecosystem
Building a robust founder support ecosystem is crucial for the success of small businesses, significantly impacting their growth and sustainability. Such an ecosystem would encompass a variety of components designed to facilitate both community and skill development among entrepreneurs. Key to this ecosystem are regular networking opportunities, including workshops, seminars, and events that allow founders to connect with like-minded individuals, industry experts, and potential investors, fostering a collaborative and supportive environment.
Additionally, mentorship programs play a vital role by providing access to experienced business mentors. These mentors offer invaluable insights and guidance, helping founders navigate the myriad challenges of running a business and developing effective strategies. Together, these elements create a dynamic support system that empowers founders to thrive in competitive markets.
Founder Grants and Funding Opportunities
To address the pressing funding challenges faced by small business founders in Australia, a new system of founder grants could be established by both government and private sectors. This system would offer substantial grants, up to $250,000, designed to meet critical business needs such as employee hiring, leadership development, business structure development, automation, and AI development. These grants would be awarded in full or staggered over a period, allowing founders to quickly implement necessary technologies and expand their workforce. For funding needs that exceed $250,000, a co-funding model could be introduced. Under this model, founders would be required to contribute 25% of the grant amount. This co-funding approach ensures that funds are spent wisely and that founders are fully committed to the success of their projects, fostering a sense of ownership and responsibility while also leveraging external financial support.
As Australian founders contend with the dual challenges of high taxation and limited funding opportunities, it becomes imperative to glean insights from international best practices and reform the domestic landscape to enhance support for entrepreneurship and retain it within the country. The stark reality that many Australian founders feel compelled to relocate to countries with more favourable conditions underscores the urgency of reform. These entrepreneurs seek environments where tax burdens are lighter, grants are more accessible, and support systems are consistent, characteristics that fuel innovation and business growth.
The successful strategies employed by countries like the United States, Singapore, and Estonia highlight the importance of a supportive ecosystem that includes financial incentives, straightforward business operations, and access to academic, private and governmental support. These nations not only provide tax relief and direct funding but also ensure founders have access to a nurturing environment filled with networking opportunities and expert guidance. They use the model, teach a founder how to fish and the founder will feed a village, country and even the world.
Conclusion
For Australia to retain and attract entrepreneurial talent, adopting a tiered tax system could alleviate the initial financial pressure on new businesses, allowing them to reinvest profits into growth and development. Implementing a Growth Incentive Plan would further enable businesses to thrive by offering tax rebates or deductions tied to specific growth achievements. Moreover, the establishment of founder-specific grants up to $200,000 could address immediate operational needs without the burden of upfront costs, while a co-funding model for larger grants would ensure responsible spending and founder commitment.