As foreshadowed in the National Innovation and Science Agenda announced late last year, the Government tabled The Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 on 16 March 2016. The Bill, which (if passed), comes into effect on 1 July 2016, aims to promote commercialisation of high-growth potential Australian early stage innovation companies (ESICs) by offering concessional tax treatment to investors.
Tax Offset for Investors
The benefit for investors in ESICs is a non-refundable carry-forward tax offset for qualifying investors equal to 20 per cent of the amount paid for the qualifying shares. This results in 20 percent of the amount invested in qualifying shares being applied to reduce the investors' tax liability in the financial year that the investment is made, commencing in the 2016/17 year, or carried forward to a future income year.
This incentive is designed to fill a gap in the existing government tax concession framework that is already in place, namely Research and Development (R&D) Tax Incentive, Early Stage Venture Capital Limited Partnership (ESVCLP), Venture Capital Limited Partnership (VCLP) and Accelerating Commercialisation regimes which usually apply to companies with a developed concept.
The tax incentives are intended to apply to broad range of investors, including investing as a corporation, individual, trust or partnership. Benefits for trusts and partnerships will flow through to beneficiaries and partners.
There are no restrictions on investor residency, nor are there any restrictions on the amount an entity may invest if they meet the requirements of a sophisticated investor test. There is a $200,000 cap on the value of the tax offset, so investments over $1,000,000 will not attract additional tax offsets. Retail (non-sophisticated) investors are limited to investing amounts of $50,000 p.a. Retail investors will not be entitled to any tax offset if their investment exceeds this maximum threshold.
A qualifying investor must not hold more than 30% of the value of shares in the ESIC and must not be deemed an affiliate of the ESIC. For example a director-owner of an ESIC would be precluded from qualifying for the offset as they would be deemed an affiliate.
Qualifying Early Stage Innovation Companies (ESICs)
Startups that qualify for these investor tax incentives must be less than three years old and have expenditure of $1million or less with assessable income up to $200,000 in the past income year. ESICs that receive one or more investors in a financial year will need to provide the Commissioner information about these investors in the approved form 31 days after the end of the financial year.
Capital Gains Tax treatment for Investors
An investor that acquires shares in a qualifying ESIC will be deemed to hold these shares on capital account. Where the shares are held for less than 12 months, the investor will be subject to tax on capital gains arising from the sale of the shares but must disregard any capital losses. Where the shares are held for longer than 12 months and less than 10 years the investor may disregard any capital gain arising from the sale of the shares and must also disregard any capital losses. Shares held for longer than 10 years, will attract a cost base equal to their market value on the 10 year anniversary of the share holding.
While we believe the three year (age of the company) threshold should be expanded, these amendments are a positive step to enable start ups to access much needed capital. Should investors or start ups require guidance on the application of this Bill please contact Jamie Towers on 07 3218 3900.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.