To support its commitment to innovation, the Government has introduced a Bill proposing to amend the tax laws to provide generous tax incentives for start up innovation companies.

Under the incentives, no tax would be payable on capital gains from shares in qualifying start up innovation companies where the shares have been held for between one and ten years. Investors will also be able to claim a non-refundable carry-forward tax offset of 20% of the value of their investment up to a maximum offset cap amount of $200,000.

Importantly, in order obtain these incentives, investors will need to assess whether the start up company meets the qualifying conditions in the law. There are three basic criteria that will need to be satisfied:

  • the start up company needs to be an Australian-incorporated company;
  • the start up company needs to be at an early stage of its development. The investor needs to assess this against four statutory tests;
  • the start up company needs to be "developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return". Assessing whether this test is met requires choosing between a principled based definition or applying specific criteria set by the government.

If the Bill becomes law it is proposed to commence from 1 July 2016.

These tax incentives are a significant boon for investors in start ups. Prior to investing in start up companies from 1 July 2016, investors should consider whether the qualifying requirements for the incentives are met.