Innovation and tax reform important for Indigenous economic growth

Last month KPMG released the publication Igniting the Indigenous economy, which put forward a series of recommendations that we believe, if enacted, could provide a significant economic boost to Australia’s Indigenous people.

The publication brings together prominent Indigenous thinkers with KPMG specialists to provide tangible recommendations focused on economic development. The proposals cover a range of areas – here, we focus on two of them: innovation and tax reform.

Innovation and tax are not the only areas that need attention, rather all ideas put forward in Igniting the Indigenous economy aim to move the agenda away from passive welfare to increased employment and entrepreneurial activity.

Innovation

The world is now entering a fourth industrial revolution. Known as Industry 4.0, this will be characterised by technological advancements creating a blurring of the physical, virtual and biological realms.

No-one yet knows what the employment and entrepreneurial opportunities will look like and our understanding of the kinds of skills necessary in the new economy is still being developed.

In that sense, there is opportunity for young Indigenous Australians to begin their skills development from a relatively level starting point.

With 60 per cent of Indigenous Australians aged under 35 years, the relative youth of the Indigenous population compared to non-Indigenous positions them well to take advantage of the competencies that will power the start-up economy. We recommend that increased investment in STEM subjects, especially coding, is money well spent. This extra effort will have an equalizing effect on opportunity. 

Education and training is also needed beyond school level in areas like entrepreneurship, agile management, lean startup, human-centred design, commercialisation and intellectual property (IP) management.

For existing Indigenous businesses, there is a risk that they could be left behind in the old economy. For example, accelerators and incubator programs which are important in the cross-pollination of ideas, are usually clustered in urban areas.

Therefore, we need to ensure that Indigenous business people, often located in outer suburbs and regional areas, have access to these programs and supportive environments.

If education is key, so is access to capital.

Impact investing, social bonds and other means of developing funding sources to support Indigenous enterprises can be utilised in this context.

We also need platforms that expose Indigenous entrepreneurs to venture capital, angel investors and other funding. If we do this, opportunities will be made available to Indigenous businesses in areas like agri-tech, mining-tech and clean-tech.   

Tax reform

While fostering innovation and educational improvements are necessary long-term initiatives, we propose the economic empowerment of the Indigenous population would be greatly enhanced by the creation of four types of investment bodies. Each would have specific taxation characteristics.

While each type of investment body contains a revenue cost, we believe that if they were properly drafted for the benefit the Indigenous community, then the long term benefits would greatly outweigh the costs.

1. Investment vehicle: Indigenous Community Development Corporation (ICDC)

We propose that the Federal Government introduce a company specifically designed for an Indigenous community to hold assets, make investments and receive income from royalties. It would be modelled on a proposal by the Taxation of Native Title and Traditional Owner Benefits and Governance Working Group. 

The ICDC would be able to invest a portion of its funds in active local Indigenous businesses. Bands, or minimum and maximum thresholds, would encourage the right balance of investment in business ventures of the Indigenous community now, as well as preserve low income producing assets for the future.

This would enable Indigenous corporations to unlock the economic potential of their assets for the benefit of present and future generations, and free them from the restrictions of charitable trust obligations and limitations.

The ICDC would have tax exempt status and would need to comply with high standards of corporate governance. It would be audited by external auditors and be reviewed by an independent regulator such as Australian Securities and Investments Commission (ASIC) or Office of the Registrar of Indigenous Corporations (ORIC). Accounts of each ICDC would be public documents and easily available on a website.

2. Entrepreneurial vehicle: Indigenous Business Enterprise (IBE)

A number of bodies have recommended the formation of an IBE. We would recommend the formation of an IBE that has certain attractive tax characteristics, but does not fall outside the corporate income tax system completely. This is because tax compliance provides a discipline for small businesses, which can give rise to an understanding of the numbers and better decision-making.

The proposed IBE would involve three features.

First IBE would pay a small amount of tax where profitable. This would depend on the percentage of Indigenous ownership. Thus, an effective five per cent tax rate would apply where 100 per cent Indigenous ownership is, rising to 10 per cent where the Indigenous ownership percentage exceeds 75 per cent, and so on. This would also involve an Indigenous employment target of perhaps 40 per cent, while a further 50 per cent discount on the tax rate could apply where a 60 per cent Indigenous employment threshold is met.

A second feature is that an additional 50 per cent capital gains tax discount could apply to a vendor selling a business to an IBE, provided there were no back-to-back sale arrangements. This would encourage the sale of businesses to Indigenous entities and enhance the prospects of economic parity between the Indigenous and non-Indigenous population.

Thirdly, an IBE would be able to transfer to taxation benefits of depreciation and capital allowances to a corporate investor. Properly structured this would lower the cost of acquisition of capital equipment for Indigenous businesses and reduce the risk of investment by corporations.

3. Large Indigenous Projects

There is a significant need for large scale projects in northern Australia and remote areas in particular.

The concept here is to provide a 10-year tax holiday to investment that exceeds a certain threshold, say $50 million, and meets certain criteria on Indigenous employment, ownership, board membership and, if appropriate, remoteness. The holiday could be scaled back where the criteria are partially met.

4. Indigenous Equity Funds

It is important that there are investment funds that can encourage the growth of small Indigenous businesses into medium and then larger ones. Such funds would require specific expertise. They should be commercially motivated and not based on philanthropy. The Federal Government should cover training costs and potentially match funding on a dollar for dollar basis in a manner that has been proposed for certain innovation funds. Such funds would be transparent for tax purposes and thus not give rise to additional taxation costs for an investment.