Closing Date for Government Submissions – 24 February 2016
Further to our recent update on the Commonwealth Government’s National Innovation and Science Agenda. The Government has issued a consultation paper (available here) on the proposed Tax Incentives for Early Stage Investors, and provided an update on how these incentives might operate. As part of the consultation, the Government wants to hear your views on what investments should be eligible for the proposed tax incentives.
The Government is proposing a number of methods to determine whether an investment is going to be eligible for the tax incentives.
The government has stated in the consultation paper that they do not want to exclude high-growth potential industries like financial technology, but there seems to be a fine line of what investments are going to be permitted to access the tax incentives within these industries and the out-right exclusion. See below for more detail.
Proposed Tax Incentives
The proposed tax incentives are:
- 20% non-refundable tax offset for the amount paid for newly issued shares in an innovation company, where the amount is paid either directly to the innovation company or indirectly through a qualifying innovation fund.
- Investors will receive a non-refundable tax offset of up to $200,000.
- No capital gains tax from the disposal of shares in an innovation company provided those shares are held for at least three years;
- Where shares are held for more than 10 years, any incremental gain in value after 10 years will be subject to capital gains tax.
Australian Innovation Company
It is proposed that an eligible innovation company must meet the following criteria:
- Incorporated in Australia during the last 3 years;
- Had assessable income of $200,000 or less in the prior income year;
- Had expenditure of $1,000,000 or less in the prior income year; and
- Is not an entity listed on any stock exchange.
Further, to become a qualifying innovation company, the Government is seeking submissions on the following methods to determine whether the innovation company’s investors should then qualify for the tax incentives. The Government is considering to include 3 methods to determine whether a company qualifies. These methods are:
Method 1 – Principles Based
- Changes the way an organisation, service delivery or process operates;
- Creates a new product or service that other organisations or consumers could use;
- Creates a new platform for the delivery of products and services;
- Changes the way an organisation, service delivery or process operates; and creates a new organisational or marketing method.
Method 2 – Gateways and Safe Harbours
- Companies with a proportion of research and development claims to other expenses above a particular percentage threshold;
- Companies that have completed or have been accepted into an approved accelerator programme;
- Companies that have one or more existing third party financial investor that have previously subscribed for equity;
- Companies that have been supported by Commonwealth or State Government programs; and
- Companies that have, within the last three years, developed, acquired or licensed an idea that has been filed as a patent in multiple jurisdictions.
Method 3 – Determination
The company could seek advice from the ATO to determine whether it qualifies.
The Government is also proposing a number of exclusions. These include:
- Dealing in land, commodities, shares, securities or other financial instruments;
- Banking, insurance, money lending, debt factoring or other financial activities;
- Receiving royalties or licence fees;
- Providing legal or accounting services;
- Property development;
- Holding, managing or occupying woodlands, any other forestry activities or timber production;
- Producing coal or steel;
- Operating or managing hotels;
- Operating or managing nursing homes or residential care;
- Subsidised generation or export of electricity;
- Provisions of services or facilities for another business;
- Dealing in goods otherwise than in the course of an ordinary trade or wholesale or retail distribution;
- Farming or market gardening; and
While we can see the need for some outright exclusion, nobody can predict the future, and the significant innovation that could occur within these “excluded and well established industries” might not happen due to the tax incentives being skewed away from them. It could be that these established industries are the ones where disruptive innovation is required.
Who can make a direct investment?
The Government is considering whether only sophisticated investors (as defined by the Corporations Act) can make a direct investment into an eligible innovation company. This will remove a whole class of potential initial investors’ access to the tax incentive. The class most likely affected are the friends and family of the entrepreneur, who may not qualify as a sophisticated investor.
Further the Government is proposing that an investor will not have access to the tax incentive if they hold or are to hold 30% of the eligible innovation company. The Government is also seeking views on proposed integrity measures.
The time frame to make a submission is Wednesday 24 February 2016, and submissions can be made here.