On 17 March 2016, the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 was released by the Government. The Bill contains the proposed new tax regime for early stage investors and start-ups and follows those incentives previously announced by the Government at the National Innovation and Science Agenda in December 2015.
The benefits under the proposed regime will be available to all investors including unsophisticated investors (subject to a $50,000 yearly cap) and foreign residents, other than widely held companies.
To qualify, the investment must meet the definition of an Early Stage Investment Company (“ESIC”).
An Australian incorporated company will qualify as an ESIC where:
- it is at an early stage of its development (“Early Stage Test”); and
- it is developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return (“Innovation Test”).
Early Stage Test
A company will be in the “early stage of its development” where the company has been incorporated (or registered in the Australian Business Register) in Australia within the last three income years (the latest being the current income year at the test time).
Alternatively, the company has been incorporated in Australia within the last six income years, and:
- it and any wholly-owned subsidiaries must have incurred expenses of no more than $1 million in total across all of the last three income years (the latest being the current income year at the test time);
- must have total expenses of $1 million or less in the previous income year;
- must have (including any wholly owned subsidiaries) derived assessable income of no more than $200,000 in the previous income year; and
- must not be listed on any stock exchange.
Innovation Test
There are three ways in which a company can qualify as an ESIC under the Innovation Test.
A company may choose to:
- Apply their circumstances against the objective tests using a ‘points’ system;
- Self-assess their circumstances against the principles based test; or
- Seek a ruling from the Commissioner about whether their circumstances satisfy the principles-based test.
The test time for qualification as an ESIC will be at the time of investment and investors will not lose their tax benefits if at some subsequent point after the investment is made the relevant ESIC fails to satisfy the above conditions. Whilst this is an administrative advantage for qualifying investors, future investors must be wary and cannot rely on historic eligibility, that is, they will need to assess their respective eligibility independently based on current facts and circumstances going forward.
The Concessions
In summary, the Bill provides for the following proposed tax incentives (where the relevant conditions are met):
* 20% income tax relief on up to $1 million of investment per tax year in the form of a nonrefundable tax offset;
* Any unused component of the offset can be carried forward and used against future tax liabilities;
* Exemption from capital gains tax on the disposal of ESIC shares held for greater than 12 months, but less than 10 years; and
* Investors will also receive deemed capital account treatment, meaning that all investors will be provided with the opportunity to participate in the proposed regime. (It is noted that capital losses will not be available to the investor if the investment fails.)
If enacted, the proposed measures will apply from 1 July 2016.
Overall, investors, advisers and business see the Bill as a positive move by the Government, offering tax incentives to entrepreneurs who invest in start-ups, that should provide a boost to the economy whilst promoting innovation and advancement.
Click here for a copy of the Government’s Discussion Paper, accompanying the 2015 National Innovation and Science Agenda.
Click here to view a copy of the Bill.
For further information or for any questions please contact Justin Epstein on +612 8277 0000.