Prime Minister Malcolm Turnbull recently announced a range of new tax incentives as part of his National Innovation and Science Agenda.
As mentioned by ABC news, the government will be spending up to $1.1 billion in the upcoming four years with the aim of encouraging commercialised research, development and innovation. At the core of these incentives are business based research, with specific focus on reinforcing relationships between the business communities, universities and scientific institutions.
The new tax incentive will provide investors with:
- a 20 per cent non‑refundable tax offset based on the amount invested either directly in the qualifying startup or indirectly through a fund, up to an offset cap per investor of $200,000 per year.
- The non‑refundable tax offset would be available once the funds are committed and subscribed;
- for direct investment, a capital gains tax (CGT) exemption on those investments, provided they are held in the qualifying company for at least three years; and
- for indirect investment through a fund, a CGT exemption on distributed capital gains provided the underlying investment was held for at least three years.
This measure is based on the UK’s successful Seed Enterprise Investment Scheme, which resulted in over $500 million of early stage investment for almost 2,900 companies in its first two years.
The new tax incentive for startup investors helps to offset the high costs that confront potential investors and the innovative startup companies themselves, thereby increasing the level of equity investment in innovative startups.
It is intended that, in time, this intervention will help to stimulate a critical mass of innovative businesses, early‑stage financers and those with high‑quality entrepreneurial skills in a thriving innovation environment that will sustain itself.
Key definitions
The Government proposes the following eligibility criteria for the tax incentive, which will be developed in consultation with stakeholders and is subject to change.
A qualifying investor is one who:
- invests into either a qualifying fund or a qualifying startup; and
- is limited to making a maximum eligible investment of $1,000,000 in any single qualifying startup or qualifying fund.
A qualifying fund is a:
- collective investment vehicle which:
- is a flow‑through vehicle for income tax purposes; and
- invests exclusively in qualifying startups.
A qualifying startup is:
- an Australian company, which:
- was incorporated during the last 3 income years;
- had expenditure of ≤ $1,000,000 in the prior income year;
- had assessable income of ≤ $200,000 in the prior income year;
- is not an entity listed on any stock exchange; and
- carries on a business that is defined to be eligible (where eligibility will be targeted to small, innovative companies which are likely to have difficulty accessing equity financing).
Tax treatment of investments
Direct investment
- A qualifying investor would receive a full CGT exemption in respect of its direct investment in a qualifying startup, provided the investment is held for a minimum period of 3 years.
- Shares held in a qualifying startup would be CGT exempt for 10 years, at which time the cost base of the shares in the qualifying startup would be reset at market value.
- Where shares in the qualifying startup are sold prior to the minimum 3 year holding period, the CGT exemption would be forfeited.
Indirect investment
- A qualifying investor that has invested through a qualifying fund would receive a full CGT exemption for distributed capital gains in respect of their underlying qualifying startup investment, provided the investment is held by the qualifying fund for a minimum period of 3 years.
- Where shares in the qualifying fund are sold prior to the minimum 3 year holding period, the CGT exemption would be forfeited.
Why is the tax incentive limited to investments in certain companies?
The targeting is designed to focus on innovative startup companies with high growth potential, as distinct from low-risk, low-growth companies.
Innovative startup companies with high growth potential tend to involve a high degree of risk early in their lifecycle, which can deter investors and lead to less investment in developing innovative new ideas.
Why has the Government decided to go with a tax offset, rather than a tax deduction (as per the UK SEIS & EIS schemes)?
A tax offset is a fairer way to incentivise behaviour as it provides all investors with the same level of benefit irrespective of their marginal tax rate. This limits the amount and complexity of advice required.
A tax offset also avoids unintended consequences that could arise through a deduction, which reduces an individual’s taxable income. For example, reducing an individual’s tax payable might affect child support payment obligations or HECS/HELP repayment obligations, as these are calculated using an individual’s taxable income as opposed to gross income.
A tax offset would thereby maintain integrity and fairness of the broader system.
What are the incentives?
The incentives have been organised under four titles: ‘Culture and Capital’, ‘Collaboration’, ‘Talent and Skill’, and ‘using Government as an Exemplar’.
Culture and Capital:
According to Turnbull, around 4500 start-up companies miss out on equity finance every year. Equity finance is the sale of ownership interest helping raise funds for business purposes. To combat this, this incentive will attempt to give early stage investors a 20% non-refundable tax offset (based on their investment). Furthermore, early stage investors will also receive a tax exemption from capital gains which means they will not be included in assessable income.
It was also mentioned that “there will be a relaxation of the laws on claiming losses if a company changes business activities”.
Most significantly, a $200 million CSIRO Innovation Fund and a $250 million Biomedical Translation fund will be established.
Collaboration
This incentive relies on the congregation and teamwork of the leading entrepreneurs and minds in business as well as research. Funding of Research grants will be focused on collaboration. The Research connections program, a program focused on helping small and medium businesses to collaborate with the research sector, will be relaunched as Innovation connects – keeping in sync with Turnbull’s belief that “innovation is a big cultural measure”
Talent and skill
In efforts to increase opportunity for skilled people who have the talent to get high-wage jobs, this incentive plans to introduce a $51 million coding program for years 5 to 7 targeting science, technology, engineering and maths.
$13 million will be invested in encouraging more participation of females in research industries.
The most supportive move of all is the introduction of an entrepreneur’s visa, which will allow skilled people from all over the globe to combine their knowledge with knowledge existing in Australia.
Using the Government as an Exemplar
The implementation of a new statutory board (named Innovation and Science Australia) is the Government’s effort of having a single body responsible for the direction of the innovation plan.
Additionally, this incentive will make available to small businesses the money spent by the government on communications technology.
When does the tax incentive start?
The tax incentive will have effect from the date of Royal Assent of the enabling legislation; that is, the date when the legislation becomes law.
This is designed to increase certainty for investors and avoid retrospectivity. Definitions for an eligible innovative startup company, as well as details of the new fund type that will be required to invest exclusively in innovative startup companies, are to be determined in consultation with stakeholders, which is expected to occur in early‑2016.
Industry Minister Christopher Pyne mentioned that a large part of these measures in the Innovation plan will start from July 2016. It will be interesting to see how this will affect Australia’s eco-system as well as how start-up and technology industries respond to the measures that have been proposed.
If you have any questions regarding taxation, please don’t hesitate to get in touch with the team at Fortis Accounting Partners. You can reach us on 02 9267 0108, or via info@exemplary-financial.flywheelsites.com.
