Gains tax will 'decimate' technology start-up funding

Simon Wilkinson wants a seven-year exemption period for investors in any New Zealand company that migrates offshore. Picture / Brett Phibbs

If the new tax for offshore share investments had been in place four years ago, Auckland biotechnology company Virionyx would not exist today, says chief executive Simon Wilkinson.

The proposed tax changes will decimate the funding of start-up technology ventures, Wilkinson says.

"Having some high-profile successes with some serious money coming back into New Zealand is exactly the shot in the arm that this risk capital sector of the market needs.

"And against that, this tax will just completely gut it." Virionyx has about 1350 Kiwi investors and some would be affected by the proposed tax change with the company planning a US listing and incorporation within the next two years.

The company would retain its operational base in New Zealand but float in the US to fund phase III trials of its Aids drug HRG214.

The bill seeks to tax some of the gains in the market value of shares held in companies outside Australasia - provided the investor's portfolio had cost, and retained a value of, at least $50,000.

Wilkinson says the changes could kill a start-up technology company before it even gets off the ground.

Many New Zealand technology companies have to migrate overseas in search of development capital and to get closer to their end market.

However, residents who currently invest in technology companies at their high-risk start-up stage would not continue to do so if they have to pay capital gains tax when the firm moved offshore, Wilkinson says.

Part of the attraction for early investors is the value an overseas listing could generate.

Nick Warren, policy and project manager at industry body NZBio, says the tax will pull the rug from under the biotech sector.

"The pharmaceuticals and health therapeutic sides of biotech will be severely tested by the rules if they continue as they stand," Warren says.

However, agritech companies could reach their potential in New Zealand's market.

Wilkinson had in the past five years helped raise more than $40 million for a variety of technology start-ups.

The vast majority of people who put money into these high-risk ventures earn between $60,000 and $100,000 a year and own their own business, he says.

"Your chance of getting that money off that sector ... if they know that there is a very good likelihood that they'll be rewarded with a capital gains tax, I can tell you they'll just keep their money in their pocket," Wilkinson says.

Officials have been positive in their approach to dealing with the unintended effect on fund raising but the concern remained that any exemption be effective, he adds.

The bill contains an exemption if the total number of individual New Zealand shareholders in a foreign company in certain countries is 100 or less (with associated parties counting as one person) and the shareholders collectively own at least 10 per cent of the foreign company. But Wilkinson says it doesn't go far enough.

Wilkinson would like to see a seven-year exemption period for investors in any New Zealand company that migrates offshore.

After that the share value could be used as a baseline for applying the tax.

To ensure the exemption is used only by start-up companies a maximum annual revenue test of $10 million averaged from the previous three years could be applied, he says.

"As with any exemption, clearly they need to be concerned that once you've created the exemption you don't get unintended companies lathering themselves up in butterfat and squiggling through the hole."