‘Tax Incentives for Innovation’ Bill Introduced to Parliament
On Tuesday the 15th of March 2016, the Australian Government introduced legislation into parliament relating to two new programmes announced as part of the Turnbull Government’s National Innovation and Science Agenda (NISA). The Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 will bring into law new tax incentives for early stage investors and make changes to venture capital limited partnerships.
Tax Incentives for Early Stage Investors
Of most interest to the start-up and entrepreneurial community are the tax incentives for early stage investors (TIFESI). These incentives will encourage new investment in Australian early stage innovation companies with high growth potential by providing investors with a tax offset and capital gains tax exemption for their investments in qualifying companies.
The TIFESI will help early stage investment companies (ESICs) to attract seed funding and pre-commercialisation equity and help them navigate the valley of death by:
- Providing entities that acquire newly issued shares in an Australian ESIC with a non-refundable carry-forward tax offset of 20% of the value of their investment (subject to a maximum offset amount of $200,000); and,
- Allowing investors to disregard capital gains realised on shares in qualifying ESICs that have been held for between one and ten years.
In addition, a total annual investment limit of $50,000 applies to retail (non-sophisticated) investors.
What is an Early Stage Investment Company?
To qualify as an ESIC a company must be:
- An early stage company – That is, an unlisted company less than 3 years old that has total expenses of less than $1 million and assessable income of less than $200,000; and,
- An innovative company according to one of the following tests:
- Principles based test – the company must be developing a new or significantly improved innovation (in the form of a product, process, service or marketing or organisational method) for the purpose of commercialisation and be able to show that the business relating to that innovation has potential for high growth, has scalability, can address a broader than local market and has competitive advantages; or,
- Objective test – the company must show it is able to reach a points threshold based on objective criteria such as level of expenditure included in R&D Tax Incentive claims, receipt of prior investments/grants, receipt of patents and/or co-development with research organisations/universities.
To ensure the incentives achieve the Government’s objectives, there are a number of other provisions in the bill that seek to limit certain behaviours and maintain integrity of the programme. These provisions include caps on the offset available in scenarios involving affiliates investing in the same ESIC, and disqualification from the offset for interests obtained through employee share schemes.
If passed, the bill will come in effect on 01 July 2016. Stay tuned as we keep you up to date with the progress of the bill and provide details regarding other NISA initiatives. If you would like to speak to us directly please call on (02) 9126 9100 or send an email to firstname.lastname@example.org