The Treasurer has today released details of reforms that seek to boost the start-up sector.
The measures are a collection of specifically targeted tax incentives associated with developing a new innovative start-up culture in Australia. This is expressed to be part of the Turnbull Government’s National Innovation and Science Agenda.
The key to the reforms dealing with startups will be the scope of the enterprises to which the new regime will apply. It is very pleasing to hear that the Government will be consulting in relation to the scope of these enterprises. The success of the measures will rely heavily on being able to establish clear and unequivocal guidance in relation to those enterprises which are able to take advantage of the new regime.
There are four key measures:
Tax concessions for early-stage investors in innovative startups
These provide tax breaks for early-stage investors. Such investors will receive a 20% non-refundable tax offset based on the amount of their investment.
In addition, a capital gains tax exemption will apply on the disposal of their interest in the start-up. A condition will be that the investor will need to hold the relevant investment for more than three years.
This measure is based on the Seed Enterprise Investment Scheme in the UK. The tax concessions are likely to create considerable interest in investment in innovative startups.
One of the key issues which will need to be determined will include the eligibility of investors who are able to take advantage of the regime. One of the significant elements to ensure that the regime is successful will be to enable investors to make collective investments.
Prudential requirements around what is a qualifying entity and the qualifying trade or business activity will be critical to ensuring the success of the regime. It is anticipated that it would be similar to the existing exclusions for the venture capital regime.
There are also likely to be prescriptive rules which will need to be satisfied to establish that the relevant investment is a qualifying investment. This is an area which has created some complexity in relation to the operation of the UK Seed Enterprise Investment Scheme.
Early-stage venture capital
The tax offset regime is to be extended to early-stage venture capital limited partnerships. A 10% non-refundable tax offset is to be provided.
The existing cap on committed capital will be increased from $100 million to $200 million for new early-stage venture capital limited partnerships.
Important changes to the loss carry forward rules
The existing loss carry forward rules are very difficult to satisfy where there is a change of ownership. This because of the narrowness of the continuity of business test and the income injection test. The change will make it simpler to carry forward losses in start-up vehicles.
This measure should provide new investors into these vehicles with a greater certainty as to the ability to carry forward tax losses. The ability to carry forward these tax losses can have an important impact on the ability of start-ups to build cash reserves.
Limits on depreciable deductions for a tangible asset
Many of the existing depreciation deduction rules for intangible assets apply the deduction regime over their statutory life. This can in many cases be significantly longer than the economic life of the asset. The proposed changes are to allow for depreciation over the economic life of such assets. This will have a significant benefit on the ability to take advantage of depreciation allowances for these intangible assets.