The NISA announced several tax initiatives aimed at opening up new sources of finance for Australian entrepreneurs.
Tax incentives for early stage investors
One of the key announcements seeks to promote investment in high-growth potential start-ups by offering concessional tax treatment to investors, including:
- a non-refundable tax offset for 20% of the value of the investment, capped at $200,000 per year; and
- a ten-year exemption on capital gains tax on the investment, provided the investment is held for a minimum of three years.
The tax incentives will be available to investors in companies that:
- undertake an eligible business (eligibility criteria are yet to be determined);
- are unlisted and were incorporated during the last three income years; and
- have expenditure of less than $1 million and income of less than $200,000 in the previous income year.
The incentives are expected be available from 1 July 2016.
Tax incentives for venture capital fund investments
The government also announced initiatives designed to increase venture capital funding for start-ups.
- a 10% non-refundable tax offset for investors in certain partnerships that qualify as Early Stage Venture Capital Limited Partnerships (ESVCPs);
- relaxation of the eligibility and investment requirements for ESVCPs and Venture Capital Limited Partnerships to allow managers to undertake a broader range of investment activities and to enable a greater diversity of investors to participate in these funds;
- the maximum fund size for new ESVCLPs will be increased from $100 million to $200 million; and
- eliminating the requirement for ESVCPs to divest a company when the company's value exceeds $250 million.
These incentives are expected be available from 1 July 2016.
Tax initiatives for start-up companies
In addition to the above, the government has announced a number of other initiatives designed to relax the way in which certain tax rules apply to start-ups:
- increased access to carry forward tax losses: under current law, tax losses incurred in one income year may only be utilised in a later income year where certain integrity rules are satisfied. Where a start-up takes on new investors, these rules may require that strictly the same business is carried on at the time the loss is utilised and that no new businesses are carried on. proposed changes would relax the same business test to allow start-ups more freedom to pursue new opportunities without jeopardising access to their tax losses. Under the relaxed test, companies would be able to access losses where their business, while not the same, uses similar assets and generates income from similar sources. The new test is expected to apply to losses made in the current and future income tax years;
- faster depreciation for certain intangible assets: this measure is intended to make investment in start-ups' intellectual property a more attractive investment option. Broadly, it would allow the business to self-assess the tax effective life of acquired intangibles in place of the fixed effective life currently set out in the tax law. This change would apply to assets acquired from 1 July 2016; and
- disclosure documentation for employee share schemes: broadly, certain "non-disclosing companies" would be able to offer shares to their employees without having to reveal commercially sensitive information to competitors. Legislation is expected to be introduced in the first half of 2016.
These add to a number of recently enacted measures that may be relevant to start-ups, including:
- expanded tax concessions for Employee Share Schemes - please see our previous alert on this topic here;
- provisions allowing eligible small businesses with a turn over of less than A$2 million to immediately deduct a range of expenses associated with starting a new businesses, such as professional, legal and accounting advice expenses (including certain costs of raising capital). This initiative applies from the 2015/2016 income year onwards;
- a lower company tax rate of 28.5 per cent (rather than 30 per cent) from 1 July 2015 for small business companies with an annual turnover of less than A$2 million;
- an immediate deduction for eligible assets costing less than $20,000 bought from 7:30pm on 12 May 2015 until 30 June 2017 by a small business with an annual turnover of less than A$2 million (available in the financial year in which the asset is first used or installed); and
- a Fringe Benefits Tax (FBT) exemption for work related portable electronic devices provided to employees for businesses with an aggregated annual turnover of less than A$2 million.