On 7 December 2015 the Federal Government released the National Innovation & Science Agenda – its "Innovation Statement".
At the heart of the Innovation Statement is encouraging a business culture that embraces risk, pursues innovative ideas and commercialises more research.
The Prime Minister is calling for an "Ideas Boom". The Innovation Statement comprises a broad suite of measuresstimulate business growth and create jobs whilst bolstering Australia's competitiveness at a time when the mining boom is tapering.
The key tax measures supporting the Innovation Statement are:
- TAX INCENTIVES FOR EARLY STAGE INVESTORS.
Tax incentives will be available for investors in "start-ups" – defined as unlisted companies incorporated within the last three years and with expenditure less than $1 million and income of less than $200,000 in the previous tax year.
The incentives are:
- 20% non-refundable tax offset on investments; and
- 10 year capital gains tax exemption.
The tax offset (reducing an income tax liability) will be capped at $200,000 of the capital investment (ie. equivalent to a $1 million investment) per investor per year. The capital gains tax exemption will apply for investments held for more than 3 years and less than 10 years.
Some issues that remain to be clarified include the kinds of "eligible business" required to be undertaken by the start-up entity and whether the incentives will be limited to investments in companies (as currently suggested) or expanded to include businesses operated through common alternative structures (eg. trusts).
- TAX OFFSET FOR INVESTMENT IN EARLY STAGE VENTURE CAPITAL LIMITED PARTNERSHIPS (ESVCLP).
Partners in ESVCLPs will be eligible for a 10% non-refundable tax offset on capital invested during a tax year. The maximum size of ESVCLPs will also be increased from $100 million to $200 million. Note again that the tax offset is non-refundable.
- A MORE FLEXIBLE APPROACH TO ACCESSING EARLY STAGE TAX LOSSES.
Where there have been majority changes in ownership of start-up companies (eg. by introduction of significant new capital) such that they need to rely on the "same business test" to utilise early stage tax losses, there is currently a disincentive to take advantage of new opportunities to support profitability (ie. doing so may result in a failure of the current test). For eligible companies, it is proposed that the same business test be replaced with a "predominantly similar business test".
- SELF-ASSESSMENT OF THE RATE BY WHICH TO DEPRECIATE INTANGIBLE ASSETS.
The proposal will effectively allow business to more closely align the tax depreciation of intangible assets with the period for which they are expected to produce economic benefits. This would generally allow higher tax deductions over a shorter period, thus making investment in companies exposed to such assets more attractive.
A WELCOME START
The tax incentives are clearly directed at encouraging an injection of capital into innovative start-up businesses that may not otherwise attract such investment and should therefore be welcomed. However, a question that arises is how efficiently two of the main features of the incentives will contribute towards making Australia more internationally competitive in the fight for investment in start-ups.
First, the tax offsets are non-refundable and will have the effect of reducing an investor's tax liability. Such credits do not provide a cash refund to the extent of any excess. Accordingly, the real benefit will only be available to those with an Australian tax liability.
Second, the 10 year capital gains tax exemption seems to be premised on there being a capital gain that would otherwise be subject to tax in Australia. Foreign investors usually would not be subject to Australian capital gains tax in respect of such investments.
The Innovation Statement encourages embracing risk. With Budget stress a contemporary political theme, the Government seems to have taken a calculated risk of its own with the Innovation Statement.
For example, whilst the 20% non-refundable tax offset will attract much political attention, it is capped at $200,000 and so is unlikely to represent a significant cost to the Budget. Further, for the capital gains tax exemption to be worth anything, there must first be a capital gain. The odds are usually stacked against significant capital gains being realised from investments in start-up companies.
However, by that stage, the Government may already have achieved some of its objectives, with business taking risks to commercialise research, attracting investment and creating jobs. For that reason, the Innovation Statement and the opportunity to contribute through the consultation process should be welcomed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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