The Federal Government on 16 March 2016, introduced the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 which is designed to provide concessional tax treatment to investors to encourage investments in new and fast developing start-up companies. If passed, the Bill will apply from 1 July 2016.
What is the purpose of the Bill?
The purpose of the Bill is to promote investments in Australian ‘early stage investment companies’ (ESICs).
In order to achieve this, the Bill is proposing a 20 per cent non?refundable carry forward tax offset on investments that is limited to an amount of $200,000 per year and if an investor holds an investment for 12 months or more, they are entitled to a 10 year capital gains tax exemption.
Treasurer Scott Morrison predicts that the Bill will ‘help to drive investment, economic growth and jobs in our transitioning economy by encouraging innovation, risk taking and an entrepreneurial culture in Australia’.
What is an Early Stage Investment Company (ESIC)?
To be classified as an ESIC, a company must meet the following characteristics:
- Must be less than three years old and have had income of less than $200,000 and incurred less than $1 million of total expenses in the previous income year; and
- In order to classify as an innovative company, it must pass one of the following tests:
- Principles based test – requires a company to satisfy five tests such as ‘high growth potential’ and ‘competitive advantages’ in relation to developing or improving an innovation.
- Points based test – allows an ESIC to self-assess their activities and show that it is able to reach more than 100 points based on attributes such as the level of expenditure deductible as research and development, collecting grants, contributing to accelerator programs and/or receiving patents.
What does the Bill mean for ESICs?
As the Bill, if passed, will apply from 1 July 2016, the new offset (as mentioned above) for investments will begin to apply on shares issued on or after 1 July 2016. Therefore, this will cause a timing and funding gap for ESICs.
Additionally, ESICs will be required to provide the Australian Taxation Office (ATO) certain information about the multiple investor entities that they have received investments from within 31 days after the end of that financial year as well as, maintaining the appropriate disclosure documents in regards to raising capital from retail investors.
What does the Bill mean for investors?
For investors, the Bill creates tax incentives for investments in ESICs, such as:
- Investors that acquire shares in an ESIC will receive a 20% non?refundable carry forward tax offset of the value of their investment, capped to an amount of $200,000 per year. This amount as an offset, will be deducted from the amount of tax an investor needs to pay. If the offset causes the amount payable to be a refund, the unused percentage of the offset can be carried forward to future income years.
- In order to help protect inexperienced investors from being trapped into risky investments, the Bill is imposing a $50,000 annual investment limit.
Also, the Bill proposes amendments in relation to the tax treatment of Venture Capital Limited Partnerships (VCLP) and Early Stage Venture Capital Limited Partnerships (ESVCLP) in order to make venture capital look more attractive to investors, such as:
- A 10 per cent non-refundable carry forward tax offset will be offered to investors who invest capital through an ESVCLP; and,
- An increase of the maximum fund size for ESVCLPs – increasing from $100 million to $200 million.
The Bill also creates barriers in regards to receiving the incentives:
- An individual who can influence the company’s actions and employee share schemes is not entitled to receive the incentives; and,
- Investors cannot receive these incentives by engaging in actions such as entering artificial and planned arrangements.
For a more in-depth information of the tax law amendment click here .
The Tax Incentive for Innovation Bill can seem daunting with all the requirements and various eligibility requirements as the above demonstrates. This is no problem for us here at Dolman Bateman. If it looks like your company can apply for the Tax Incentive contact us on 02 9411 5422 and we will take care of it for you.