Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016
- Arnold Shields
- Apr 8, 2016
- 3 min read
Updated: May 23
Promoting Growth Through Innovation
The Federal Government introduced the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 to stimulate growth in Australia's startup sector. If enacted, the Bill would apply from 1 July 2016, offering tax incentives to encourage private investment in early-stage innovative companies.
What Is the Purpose of the Bill?
The Bill aims to boost private investment in Australian Early Stage Innovation Companies (ESICs) by offering generous tax incentives to investors. This initiative seeks to support an entrepreneurial culture that drives innovation and job creation.
Key benefits include:
20% non-refundable tax offset for investors, capped at $200,000 per annum.
10-year capital gains tax (CGT) exemption for investors holding shares for more than 12 months.
What Qualifies as an Early Stage Innovation Company (ESIC)?
To be classified as an ESIC, a company must:
Be less than three years old.
Have income below $200,000 and expenses under $1 million in the prior income year.
In addition, the company must satisfy one of the following innovation tests:
1. Principles-Based Test
This requires the business to demonstrate:
High growth potential
Development or commercialisation of an innovative product or service
Scalability
Competitive advantages
Potential to address large markets
2. Points-Based Test
A company earns points based on:
R&D tax incentive claims
Participation in government-funded accelerator programs
Ownership of patents or IP
Grants received
Achieving 100 points or more qualifies a company as an ESIC.
Implications for Startups
If the Bill is passed, it will apply to shares issued on or after 1 July 2016. This means startups will need to prepare for:
A potential timing gap between capital needs and investor availability.
Disclosure obligations to the ATO within 31 days after the financial year ends.
Proper management of capital raising compliance documents for retail investors.
What’s in It for Investors?
Generous Tax Benefits
20% non-refundable carry-forward tax offset, up to $200,000 p.a.
CGT exemption for 10 years on qualifying shares held for 12+ months.
Investment Caps for Retail Protection
A $50,000 annual limit for retail (non-sophisticated) investors to reduce risk exposure.
Venture Capital Enhancements
The Bill also expands incentives for venture capital investments:
10% tax offset for capital invested via Early Stage Venture Capital Limited Partnerships (ESVCLPs).
Increase in fund size cap from $100 million to $200 million for ESVCLPs.
Eligibility Barriers and Restrictions
Investors who can influence company decisions, such as directors or employees under an employee share scheme, are ineligible for tax offsets.
Artificial or contrived arrangements to exploit the tax system will disqualify investors from the incentives.
Need Help Navigating the ESIC Landscape?
At Dolman Bateman, we understand the complexities of startup tax incentives. If you're an entrepreneur or investor exploring these opportunities, we can guide you through ESIC eligibility, investor compliance, and capital raising strategies to help maximise your tax benefits and growth potential.
Get in touch with our specialist team today to see if you or your company qualifies.
Disclaimer:
The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.
