Restricting the tax incentive to investors with net assets of at least $2.5 million and annual incomes of more than $250,000 would help prevent inexperienced investors from being lured into risky investments.
"Investment in innovation companies is inherently risky. Many investments will lose money, while others have the potential to make large gains,"
The proposal has split the startup community, with some entrepreneurs arguing smart retail investors should have the chance to invest in young companies.
"Not all mum and dad (small) investors meet the sophisticated investor requirement, yet many are very intelligent and capable of understanding the risks," said Clare Hallam, acting general manager of Pollenizer, a company that helps build business incubator programs.
"For Australia to become a truly innovative nation, we need to commence this education and not exclude mum and dad investors," she said.
Others erred on the side of caution, believing the incentive should be restricted to sophisticated investors.
Brosa co-founder Ivan Lim said limiting the offset to sophisticated investors would be a "double-edged sword".
"It's good because it ensures that capital is being invested in high-quality companies that have been assessed by sophisticated investors as having a strong chance of success," he said.
"Having said that, there is also an advantage for early-stage startups that need to raise money from friends and family to keep working on their business before they're ready to approach a venture capitalist – in circumstances like this the tax incentive could be helpful."
The 20 per cent tax offset was first flagged as part of Prime Minister Malcolm Turnbull's lauded Innovation Statement in December last year.
But the offset will not be available to all start-ups, with the consultation paper proposing limiting it to "innovation companies" which were incorporated in Australia in the last three years, have assessable income of $200,000 or less in the prior income year, have expenditure of $1 million or less, and is not listed.
|Keep Calm and Get Your Startup On|
Treasury said in the consultation paper the option of using a "sophisticated investor" test would limit it to people that are "more likely to be able to evaluate offers of securities and other financial products without needing the protection of a disclosure document".
Trimantium Capital managing director Phillip Kingston said income and expenditure tests were not effective screening tools to uncover innovative companies.
"Similarly, building a business that will have a material impact on the future of the country will take a long time, so a three-year time limit is too restrictive. Five years would provide a better runway," he said.
"A set of principles that determine the definition of an innovation company make sense. Anything too prescriptive certainly won't incentivise innovation and may have the opposite effect."
Mr Kingston also took aim at the government's proposition of excluding companies in certain industries.
"Some of the exclusions floated in the government's consultation paper are alarming and should be removed.
"Innovation in fintech, B2B and agritech provide some of the greatest opportunities for entrepreneurs and investors to build the future of Australia."
These thoughts were echoed by Unlocked chief executive Matt Berriman who said the consultation paper's suggestions were too restrictive.
"It means investors would only get an incentive for investing in businesses that are really just at concept stage, continuing to over-index incubator and seed investment and widen the already existing problem of series A, B and growth round funding in Australia," he said.
"We're not going to grow another company like Atlassian if you cap the incentives at the levels being indicated."
Disclaimer: Following article come from FinancialReview