The Budget That Could Kill Australian Innovation

Welcome to YBF's brand new podcast called I Can't Believe It's Not Butter. Today we have a very special episode. This is going to be a prequel to the launch of the podcast and it is a budget special. There are 4 of us in the podcast: David Kenney, Jeremy Cabral, Matt Browne, and myself. But today I'm going to leave those 3 giants to run you through what has happened with the budget, how it affects you, how they feel about it, and what they think is going to happen in the coming months. What you're about to see is an absolute punch-by-punch blow of what's happened with the budget and where it's going, and it will give you a prelude as to what you're going to see in the podcast. Welcome to I Can't Believe It's Not Butter.

Great to see you, gents. Welcome to another episode of I Can't Believe It's Not Butter, the York Butter Factory podcast. This is a special episode today, so this is out of sequence with our normally scheduled program, which we haven't even launched yet. So We are launching very, very soon. This will be the second episode to come out, and it's a bit of a special episode because we're here to talk about something near and dear to our hearts, which is innovation in Australia. What does it look like going forward? We've seen that we all have a very new co-founder, Mr. Albanese, Prime Minister Albanese. Great to have you on the podcast. You know, I think we've seen the posts going around town. Albo must be the busiest man in town at the moment. He seems to be able to be in at least 50 different startups a day if you're watching socials.

Very productive man.

Very productive man. You know, he's doing a lot for his 47%. And so today we're going to talk a little bit about, well, what is the impact on the Australian ecosystem? What's the impact on founders? What's the impact on employees? What's the impact on the startup ecosystem at large, which has been going gangbusters? Australia creates more unicorns per capita dollars invested than any other ecosystem on the planet. We're already an ecosystem that is underweight on capital, both at early stage and late stage. There's just not enough going around. There have been some carve-outs in the budget that have looked after the investor class, and thank God, because, you know, it's already hard enough to get investors to back an asset class when everyone likes to dig stuff out of the ground and stick stuff on top of it. But the founders and importantly, the employees of those companies seem to have been hit the hardest.

Mm-hmm.

And so, you know, I think today we're going to unpack some of that I know we've got some opinions. DK has the largest list of papers I've ever seen sitting in front of him in one of these talks. So I think he's got quite a bit to say. DK, what does this mean for you? What do you think about what's happened in the last week?

Well, this is probably the greatest budget I've ever experienced because it's incredibly fascinating. And I'm not just batting for taxpayers for once, but I am reading this and thinking, what the hell? Because it's so quickly immediately offends so many different people. And without going into the nitty-gritty, I wanted to bring a bit of calm and actually look at some of the smart people I consider smart rather than just going and bashing it and looking at what really does this mean and what do other people think? So one of the first articles I wanted to refer to was something that Chris Brickie wrote from Stockspot and he just— Rather than showing a big hard opinion on it, he just said, I'll just build a calculator. And so people can see for themselves what that means. And some of the examples that you've put in, it shows is for someone that's putting, say for example, $25,000 as an investment into a company that grows over 5 years to $40,000, the extra tax is 260%. Now I don't know whether or not that was really, Intended, but surely that's not good for investment. And then you've got people like Carolyn Brees talking about fishbowlers falling over and that's endemic for potentially, she claims it's almost a $200 or $250 billion exercise with founders not being supported and things that need to be supported that aren't getting it. Like you've got founders giving up jobs, sometimes getting 3 times the money.

Yeah.

that they were getting elsewhere to start with nothing. And the reality is it's not about being patriotic saying this tax rate's not the right way to treat anyone because you look at the same article refers to Australian super funds. When Australian super funds invest something like $80 billion and they're touted to invest about half a trillion dollars. Well, are they unpatriotic talking about this is just making it harder as well? Like, I think that there's an interesting dilemma there. And then I also read something that Tim Doyle said and he said, look, you know, I didn't start my company to save tax. It was around, I've got a chip on my shoulder. And in some ways it's not really that relevant.

Yeah.

why someone started the company. It's really understanding the platform that you're dealing with so that you can have a long-term view on what you're building and how it stands and if you're building on sand or rock or whatever. And it just seems to me to be a lot of noise out there. But I hope that these consultations, and Jeremy, you were part of one the other day, that hopefully will bring some common sense. To the discussion.

Yeah, definitely. It was Saturday after a couple of days of pretty viral posts from mates of ours. Julian Fayyad from Loan Options basically was on the way to the Kinzo office, posted about the Albo co-founder thing. And then Frank and Jack Reeve obviously have a big platform over at Kinzo and it was, I guess, spread like wildfire. So yeah, last minute we got called in to meet with Tim Wilson, Shadow Treasurer. And yeah, it was a good discussion, honestly. I think very open-minded on how policy could look like and changes like the instant tax write-offs and so on. And there's been an announcement since that meeting moving that to a $50K instant tax write-off versus I think it's $10K in the current proposed budget. So I felt it was productive. They were definitely all ears. They definitely are paying attention to social media, both parties. And it does really, I think it's quite interesting just looking at this moment in time is like how much can we stand up here and really, I guess, help them get the rubber out and kind of adjust a few things here? Because I do think certainly some things have been overlooked. And from my standpoint, I think the biggest concern I have is around the ambition for Australian current founders kind of taking it out of this country and really growing globally and staying Australian-owned businesses. Or also for prospective founders that are looking at what do I do next? I was meeting with a pretty young crew over at Airtree. They have a, it's called a Pathfinders program and they're all looking at what do I build and where should I build? And I think that this is a conversation that's at all levels, all ages at this point where I think it's quite a systemic risk for our Australian ecosystem in business.

But honestly, when you think about That $50,000 instant write-off. I don't think anyone starts a company thinking, you know, oh good, I've got an instant write-off.

Yeah.

And I mean, startups don't pay tax until there is an exit really. I mean, I guess, sorry, I do stand corrected. They do pay PAYG, they pay GST, they pay a ton of tax. They pay every other tax that most people pay. And then if you talk about R&D, well, R&D is like Just the money upfront, but you lose that later anyway. Like you lose the losses. It's not like it's magic money. It's you when you actually get to profit, should you get to profit, you've got no losses now. So it's just giving, that is a really genuine good pillar for Australian companies to have. And that's a really genuinely great initiative. It's just gone from $20,000 as a minimum threshold to $50,000.

Yeah.

But it's still a great initiative. But when people are talking about the $50,000 write-off, I don't reckon they get startups. So what I'm hoping is that the right people are in the room to actually think about, well, what will encourage people to build here? 'Cause you think about like ESV CLPs, they've got, it's almost like the principal place of residence exemption. for people like Black Nova. Like if you invest in Black Nova, that's probably the last place you can invest and get a tax-free return, which is pretty bloody good. Although I don't think that the VC runs without you.

Yeah.

So on the other hand, like you could have done something else. You've already had 2 exits, so you could have done something else and had a lot of money. But taking that wisdom of all the things that you've learnt, And sharing that with multiple founders and any carry you get, well, that just disappeared. Like that also got hit as well. So investors are okay if you're in an ESG CLP, the people running it, not okay.

No.

And the people making the decisions, well, I don't think it's about the $50,000 instant tax write-off. No, it's not. It's around, and then I saw something Steve Baxter wrote, which is like, You hope to see an environment where Australian founders are looked after so they can build here. It is a patriotic thing to stay here. It's not about paying less tax. I think people love the country. That's not at question. Saying that we want a level playing field or a better playing field, that's not unpatriotic. That's just looking at the numbers.

Yeah, look, I think, you know, when I look at sort of my startup and then building a venture fund, for me it was never about what the end outcome was or what tax I'd be paying. thinking about those things when I was building either. I think, you know, when you look at building an early-stage venture capital limited partnership, yep, we've got tax-free status for our investors and I invest in our fund. And so I will get that benefit on my own investment. But, you know, when you look at a small fund, the management fee barely keeps the lights on.

Mm-hmm.

And so, you know, we've had a rise of small fund managers, which this ecosystem desperately needs. You need people that are going early, backing founders at the start, giving them their first capital. And you need a number of small funds, both thematic and generalist, you know, that can get out there and be those first investors. But those investment managers, the people that are running those funds, you know, myself included, we pay ourselves far less than what we would earn on a market salary. It's a drop in the ocean. It barely covers a Sydney mortgage. And, you know, the reality of that is we're trading all of our time, expertise, and effort. You know, I have had 2 exits. I've built 2 big companies. And we're trading that for the future gain. And that's the reality of what we do.

Sure.

And that future gain has just gotten a hell of a lot less attractive on the carry side. For the actual, you know, person building a business, when I built Donesafe, you know, I put everything I had in that business. I dropped out, I was at CBA, I was on a pretty decent 6-figure package. I paid myself for the first 5 years of Building Done Safe $40K a year. You know, there is no trade-off on that salary into my outcome. That stuff's not being indexed, that stuff's not, you know, sort of factoring into that exit outcome. That's just money that I've forgone to build a business. And so, you know, the majority of funded startups end up failing. There is a graveyard of people that have put you know their their capital. They've employed a bunch of people. Those people have been paid along the way. They've paid their taxes along the way. They've paid payroll tax. They've paid their PAYG. They've you know they've submitted their BASs on time, and and you know yeah maybe they've benefited from a little bit of R&D upfront, but really again you're still paying for that. And so the reality now is like and and I look back to building Dunsafe. You know I said like I went and and absolutely ground. I maxed out my credit cards. I was being paid next to nothing while we were building that business, and all. All of my upside came at the end.

Hmm.

All my deferred earnings that I would've made as a relatively smart guy who had a really good corporate career, I would've made a lot more money along the journey just being an employee. And I got to the end, I'd put all of that investment in and I thankfully got the discount at the end. And that discount and the money that I made made up for all of those lost salaries. And now, absolutely, I'm sure when you look at mega exits, the trade-off might not be seen as fair. But the reality is the majority of exits that happen in startups, even the really good ones, they're not, They're not billion-dollar companies. They're $100 million companies. They're $50 million companies. They're $200 million companies. The founder, often by the time they sell the business, has a very small portion of their company left. And they've then sweated for 5, 10, 15, 20 years to get to that particular outcome. And now we're saying, you know what, you have to pay more. You have to pay more tax. And I just think that's, you know, really unfair. And then you've got the class of people that have joined this journey along the way, the employee.

Yeah.

And, you know, when I look at employees in startups, they're typically paid under market because startups don't have a lot of money. of cash, especially at the start. And those employees are given stock options and in the hope that one day that startup is valuable and they're able to trade off the fact that they've given up salary to be there on the journey and to get to the end. And, you know, when we sold Donesafe, a couple of those employees were able to pay off their mortgage. Some of them were able to buy a house for the first time, but they'd been paid probably half market for that entire journey.

And probably not able to borrow either from their salaries.

Not able to borrow. Absolutely. And so, you know, the trade-off that a startup founder or an early employee in a startup makes is on the upside at the end.

But again, it's not even that people, I think, and I speak to so many people and they're not just saying, I'm doing this for the tax. Yeah. Like it's, they're actually doing it as maybe as Tim Dorsey, I've got a chip on my shoulder, or they genuinely have this competition in them or they wanna see something and they believe in the founder's vision. But it's not about tax, but it is like now the highest tax rate for capital gains tax. Now that's not, it's just math. It's not an opinion, it's just what it is.

Yeah, it's basically made Australia completely uncompetitive for building a startup. Like the reality is if you look at any of the other mature startup markets, there are better tax incentives for the founder and for the employees under those share option plans. And Australia has now become uncompetitive. And I think that's disastrous for an economy that, you know, like Australian technology hires a huge number of people. It creates, it's one of the biggest creators of new jobs There are continuously new jobs being created by this flywheel of, you know, founders brave enough to start something, investors brave enough to get on the journey, employees brave enough to get into the business. There are a huge number of new jobs that are created through that. And I believe, unfortunately, you know, I think people will still start their business in Australia, but I do think those that are able to will move offshore faster than they've ever moved before.

And when the capital is overseas, the market's overseas, And the support system is less. I mean, how much money have we spent on export market development grants and try to get a balanced trade budget as well, like having imports from overseas? 'Cause most small businesses, the small business capital gains tax rules still say, but to a large degree that is. But if you think about startups, they are really swinging for the fence and it's gonna be much usually higher than $6 million.

Mm-hmm.

Particularly if they've got as many staff as we want them to employ and they do employ. We're over at Kinzo's office today. I must have counted 40 people or something like that. So all those people are paying tax. And then you talk about how much the value of having export dollars because all of these startups are often selling globally. So this is bringing in income that is not here. It's like a multiplier effect on our economy here, employing Australian people with that sales revenue. So I just don't understand it. Hoping that the consultation really does go a long way to actually making this more sensible.

I think even when I look at my business, at the end of the day, we sold our software in Australia, built the initial bit here, but then we started exporting and a lot of that revenue came in from overseas and the buyer came from overseas. So all that money flowed in from overseas. That was net new money for Australia.

And the funny thing is of all is really all these changes have happened. And everyone's going, oh no. But I guarantee you there'll be lots of legal firms with lots of interesting things on their whiteboards from looking at, okay, crystallising gains before 31, before 1st of July, 2027. Valuers getting busy, you know, getting, let's get some grandfathering valuations ready. Let's move towards corporate structures. Let's, I mean, stuff I would've been thinking about and wealthy People have this opportunity to do that, like restructuring their assets, et cetera, moving overseas. But founders might be, they might have their family here, but they still want to build something. They might have all sorts of things, they're very patriotic. They might like the beach. They might like lots of things that are here, but it just seems to be just overnight, it's a real shock to the system.

Yeah, I think from my perspective, the point on employees is a really important one. If you're going on this journey with a startup, does it make sense to do that in Australia any longer? I think we're going to, experience potentially a lot of talent drain into the US. And it's already been a, you know, Australia's trying to punch above its weight at this point. To have a situation where there's very low incentive to go through a startup journey of, you know, 10, 15 years, like you mentioned, to eventually maybe get an exit. Like there's such a small percentage of businesses that ultimately get to that point. Yeah, it's pretty big deal. And yeah, from my standpoint, I think that's the biggest shame. Like there's so many people really pushing to try and make sure that we have a bit of an edge. We've really pushed on this front, us with this podcast trying to raise a message around this. And yeah, man, I don't know what to say. I think a lot of people are really disheartened and trying to figure out what I do here. And I think that's just not what we need right now, especially with AI disrupting things. We really need to be doing everything we can to support the industry and support Australia really having a chance from an innovation and technology being a key kind of forefront for our success.

Yeah, look, I think you look at, you know, the US, it's, it's all guns blazing on AI. It's like move, move, move. Every dollar goes in, you know, like this is absolute nation building, it's, it's competition building. And you look at Australia and, you know, it's— you start to see the legislation coming in of, uh, you know, how do we slow AI down? You know, you've got this sort of unionist culture, you've got this like, you know, let's protect the middle class and, and the working person. The reality is that like if, if we spend all of our time protecting everybody, we end up protecting Nobody. And this is coming whether people want it or not. And the problem with us not backing ourselves locally and not having the right taxation structure in place locally, that innovation, the best and brightest minds here that are thinking about how do we make Australia a more productive place, how do we make sure people have more, that all goes overseas. All of those outcomes happen overseas. And, you know, for me as an early-stage investor, it's not like on the VC side We're still going to be, you know, we're a tax-free structure. We're going to back early-stage founders. Those early-stage founders are still going to start here. But, and so, you know, our investors will get the benefit of that. But the reality is those founders will get up and move pretty quickly and those outcomes will end up happening overseas.

Yeah.

I don't know whether or not that was the presumption that everyone would move. I don't know whether or not there are so few founders that the budget papers didn't take that into account. I don't know that there was a position that there's a lot of, there's no votes in this or we just need the money or what it was. But I think it's people like Kate Cornick from the Tech Council is also involved in this process as well to try and get people moving towards understanding this is a special class of founders. Going back even to the '90s when we were having companies that were spun up that were government agencies originally and going back to, I mean, the Future Fund of Australia was spun out in terms of selling Telstra.

Yeah.

And some of the greatest companies on the ASX like CSL, these were government companies, but we're not seeing that. So we are relying on founders to build stuff. I mean, most new jobs, Are government jobs, health, government. So we're either gonna be AI consumers or we're gonna actually build some companies. And for the people that have invested and staying, and we want a fair shot at this. And I think that's all we're saying, aren't we?

Yeah, absolutely. Well, I think at the end of the day, the benefit of more taxation is more government jobs. But is the startup we want to be known for in Australia the largest government in the world and the least productive country in the world? I don't think that's something I'd be proud of.

Yeah, you had a point, DK, on other options available. If it's about revenue generation, looking at multinationals, for example, I'm not sure if that's something you want to kind of chime in on.

Well, we can definitely talk about multinationals. I mean, if you think about how many multinationals are here and I mean, yeah, I don't know if I want to go there, but like I said, there's not a big tax rate when you look at, certainly not 47% in terms of the revenue. If you're looking at the revenue or even the profit or even the transfer pricing that pushes income into Irish, Bahamian, Bahamas structures, et cetera. All of those things that go on that are legitimised and in some ways they're good because it creates other employment jobs here. But our founders that start here, we want them to stay here. We want them to be If they go to the US and people like Jeff McQueen who went to the US and he's come back, he's got his whole bag of all of these different people he knows and he's building back in just north of Wollongong. And that's great because we want that knowledge. We want the guys that have had exits like you, Matt, and Jeremy Finder kicked ass and trying to impart that wisdom to founders so they can have more success. I feel like there's a lot of merit in not being here, but it's hard to find the positive in this.

No, look, I think there's so many other places that we could be looking to tax and it would, like, I'm not gonna sort of start labouring on all the things that we could be doing differently. I doubt the government's listening, but I think the reality, like, do we need to go and band together as the startup community, form a syndicate and buy Albo a private jet? Is that the way that we get the right lobbying happening in government? I think, you know, the reality right now is Australia is already a high-tax nation. We already have a high-tax environment for companies for, you know, as they're on the journey. We already have a high taxation rate at the exit, and we've just made that all that much harder. And so, you know, I think like this is really, you know, and I heard somebody, I wish I remember who said it, I think it might have been Janine Ellis said, you know, Albo, he's out there, he's trying to have a legacy. Is his legacy the death of innovation and the death of future productivity in Australia? Is that what he wants to be remembered for? You know, he'll be remembered for the memes. They're going to be— people will be laughing about those for a long time. And I'm sure he's ducking and covering in his office at the moment and feeling quite embarrassed as his face appears in every startup founder's video. But, you know, the reality is a lot more serious. You know, we have built— and this has been built on now generations of founders and investors building companies in Australia, employing lots of people, building the next generation. The flywheel in Australia finally feels like it's been spinning, and, you know, you're generating some incredible companies. The employees of those businesses who've had, you know, their small exits via their ESOP pool are reinvesting those to go build more companies. Um, you know, the flywheel's really spinning, and this just feels like something that's going to choke that sort of later stage, you know, outcome here in Australia. The companies will still start here, they'll still raise here, but then they'll ship overseas very Yeah, I think unfortunately that is quite a large likelihood.

But at the end of the day, there are things we can do. We're all here to appreciate that this is a great country and we've got $4.5 trillion worth of super. We've done some exceptional things as a country. As you mentioned before, we've got the highest rate of unicorns in the world. We've had some incredible technology that's been applied throughout the world.

Yeah.

And we just wanna be given the platform to let that continue because if we don't have jobs for our kids and being able to create wealth that we create ourselves rather than relying so heavily on 2 things, which is a housing market, and that is still tax-free. And I'm not sure how tax-free homes or when someone sells their business rather than investing it back into—

Yeah.

New startups, maybe they'll say, well, I do want the place at Point Piper on the water because that's tax-free if I live in it. And that's gonna maybe double in value in the next 10 years. Where else am I gonna get that value?

Completely. Like, I, you know, I don't own a house, I rent. And, you know, I could have bought whatever house I like, but I've stuck it all back into this ecosystem. And, you know, yes, absolutely, sticking it back in this ecosystem, I'm gonna benefit from some fantastic taxation on the other end as an ESV/CLP. But, you know, the fact is that, like, I would much prefer to have that money at work in this ecosystem that we've built to continue to see Australia placed as the top place per capita to build new unicorns on per capita dollars invested. And I think we have the ability to do that, but we need the government support. And I feel like the government support has been lacklustre at best for a long time, at least on the— definitely on the founder and employee side. And it's just gotten a whole lot worse.

Well, for starters, even looking at The benefits and carve-outs is founders usually don't have a cost base. When they start the company, they go, how much would my cost base be?

A dollar.

A dollar. Or let's call it a million shares, but at 0.01 cent.

But they don't have the money to put in to price them.

That's the same money.

They borrowed the money for the incorporation fee. And then so what's indexing on that? Yeah, there needs to be an absolute rock solid 100% carve-out minimum. But a 30% tax rate straight up is, and then up to 47%, I feel like that's sort of the way that's expressed is a little bit funny buggers in terms of how it's worded at the moment.

Hell, index the founder's initial sweat salary and the employee sweat salary against Albo's salary. Even that would be a good place to start.

That'd be a good place to start. And then also you've got people that are looking Going overseas even from day one now, like I'm talking to some of the accelerators and saying, do we straight away incorporate in the US now? Let's do Delaware today. I mean, what's that gonna mean in terms of how many jobs we have here or where the IP goes or where the money is banked long-term? I love Australia. I'm still here. It's just such a great country. But the founders are the next generation of wealth builders. I mean, really.

Definitely.

So I'm hoping we can nurse this forward.

Yeah, I definitely think the lifestyle here is the thing that's really keeping people from making some of these moves. But if it was any other country, there'd be mass exodus, honestly. In South America, in Chile, when new government came in, literally everyone just started moving their business out of the country. And it was like, it's hard to recover from those moments in time. And I think the risk is here But we are in reality gonna see some level of exodus and hopefully it's not something that just puts us back 10, 20 years.

It is a great country. I was sitting, it reminded me when you mentioned South America, I was sitting on a plane coming back from Melbourne from the Startup World Cup and I was sitting next to this guy from Venezuela and he was telling me, oh my God, it's so good that we got invaded. And we don't really have that knowledge of real oppression and all of the things that have happened. I shouldn't even be talking about it, but it's such a great country. It's just we need it to be, remain as a level playing field for founders. I think that's what we're saying.

Founders and their employers. I think at the end of the day, people who take a risk—

They can't do it without employees often.

No. People who take a risk need to be rewarded for their risk.

Well, that's the whole premise is risk reward. I mean, you're not on the welfare by saying, I lost my job. Well, you didn't lose it, you left. You started something, you're prepared to take unders. And you may not have got anything. Yeah. And that's— and you hired more people and you took out office space.

Yep.

Yeah. And you were up till midnight.

That's early.

I wish it was just midnight.

Exactly.

I remember the sleeping bag under the desk for the first couple of years.

Yeah.

No KPIs, just survive.

Yeah.

Make this work.

Yeah.

So it's, look, we're not going to solve everything today, but we wanted to really pay respect to all of the startup founders that have gone out there and in some ways put themselves on a limb in some ways because it's not easy speaking up. But I think that the movement and the knowledge that is in this market about how to build businesses that needs to prevail. People need to listen. The government needs to listen to some of these very, very solid pieces that are coming forward. You know, that group that you're in, Jeremy, all the things you've said today, Matt. Albo, we do love you. We'll love you more if you push this through. I mean, it would've been— I mean, just thinking too about the fact that he did go out and say there will be no change in capital gains tax, there will be no change in negative gearing.

Yeah.

I mean, yeah, I'm hopeful. Was that his idea? It's an interesting dilemma.

So yeah, they added a note at the end that there is a consultation period happening. We don't know what that consultation period is and when it ends, but I do hope that at least a bit of noise around this topic is going to hopefully change the direction of things for us.

I hope so.

I think, look, at the end of the day, we can all get behind the next generation of people having a crack. And look, if that was the original intention of the policy was for our young Australians, for those people people that are on the, you know, who are coming and starting, starting their career, starting their business, you know, thinking about buying their first house. Australia should be a place where everyone can buy a house, you know. Like, I love the fact you look at places like Singapore, everyone has, you know, all the residents have a place to live. I think at the end of the day, you know, we should be able to buy a house, and I think taxation should be in place to, to support people in doing that. But, you know, you don't want to absolutely cut the neck off potential productivity and the chance of us actually continuing to be a great place to live. Nobody will want to buy a house if there's no way to make money.

Yeah, it sort of feels like the government has done a lot to support over the last 20 years even. This seems to be maybe too quickly rushed through. So let's hope we can make a difference here.

Definitely.

Yeah.

Cool.

Thank you, guys. Thank you.

Good stuff.

Thanks, Albo.

Cheers, Albo.