The Federal Government yesterday released its much anticipated National Innovation and Science Agenda which proposes a series of tax amendments.
Early Stage Venture Capital Limited Partnerships (ESVCLPs) and Venture Capital Limited Partnerships (VCLPs)
ESVCLPs and VCLPs are limited partnerships that provide certain tax concessions to their investors. For example:
- an ESVCLP provides an exemption from Australian tax on certain gains for Australian and foreign investors;
- a VCLP provides an exemption from Australian tax for certain foreign investors; and
- both ESVCLPs and VCLPs allow the manager’s carried interest to be taxed under the capital gain tax provisions.
For ESVCLPs, an additional tax incentive will be provided to partners in “new ESVCLPs” in the form of a 10% non-refundable tax offset on capital invested during an income year. For example, if a partner invests $500,000 in an ESVCLP in FY2017 they can reduce their FY2017 Australian tax bill by $50,000.
In addition, the ESVCLP requirements will be relaxed as follows:
- the permitted committed capital of “new ESVCLPs” will increase from $100m to $250m (query if this will extend to existing ESVCLPs); and
- ESVCLPs will no longer be required to divest an entity whose assets exceeds $250m.
A number of changes will be made to both the ESVCLP and VCLP regimes based on the Board of Taxation’s 2011 review into the regimes.
For example, there will be a broader range of:
- investment activities able to be undertaken; and
- investors able to invest in ESVLPs and VCLPs. For example, the BoT review recommended allowing Australian managed investment trusts (MITs) invest without being subject to Division 6C.
Unfortunately, there is no indication whether a VCLP will be able to elect to have its gains deemed to be capital gains, as is the case for MITs.
While the proposals may increase the level of early stage investments, they do not address the lack of funding options for companies seeking Series A or later investments.
These amendments are expected to apply from 1 July 2016.
Tax incentive for early stage investors
A new 20% non-refundable tax offset will apply to investments in eligible companies. The offset will be capped at an investment of $200,000 per investor per year, which equates to a reduction in Australian tax of up to $40,000 per year. In addition, investments in eligible companies that are held for between 3-10 years will be exempt from capital gains tax.
An eligible company must:
- undertake an eligible business (scope to be determined);
- have been incorporated during the last three years;
- not be listed on any stock exchange; and
- have expenditure of less than $1m and income of less than $200,000 in the previous income year.
These amendments are expected to apply from 1 July 2016. The delay between announcement and legislation could have an unintended consequence of drying up capital for startups in the intervening period.
Company loss amendments
The current same business test (SBT), which is relevant for companies that have failed the continuity of ownership test and are seeking to utilise tax losses, can be difficult to satisfy where a company seeks to undertake new activities or income streams.
The SBT will be relaxed and replaced with a “predominantly similar business test”, which will be satisfied if a business, whilst not the same, “uses similar assets and generates income from similar sources”…and “takes advantage of an opportunity a similarly placed business would take advantage of.”
While this is primarily aimed at allowing startup companies to pivot without losing their losses, it would appear that the SBT amendments apply to all companies, regardless of their size. No mention is made on whether the SBT amendments will apply to listed widely held trusts.
The amendments apply to losses made in the “current and future income years” – it is unclear if this means that a loss incurred in the 2016 income year is eligible for the new SBT provisions.
Intangible asset depreciation
Currently, certain intangible assets such as patents, copyrights, licences and in-house software have a fixed effective life (see s.40-95(7) ITAA 97).
It is proposed that taxpayers will be able to self-assess effective lives for these assets acquired on and after 1 July 2016. There is no indication whether the current prohibition on using the diminishing value method for certain intangible assets will also be revisited.
Employee share schemes
The taxation treatment of employee share schemes for startup companies was significantly improved from 1 July 2015. However, a number of issues remained with the corporate law disclosure requirements, in particular whether a startup company is required to issue a prospectus or other disclosure document (see Herbert Smith Freehills' Legal Briefing article).
The only amendment at this stage is to limit the disclosure document being made available to the public, with further consultation to be undertaken on making the disclosure requirements more “user-friendly”.