National Innovation and Science Agenda
The Budget added few new initiatives to the Government’s National Innovation and Science Agenda (NISA) which continues to focus on the start-up and small and medium enterprise communities.
Importantly, the Government did not announce any changes to its flagship innovation programme, the R&D tax incentive. In the absence of any changes to the tax incentive, the reduction in the small business income tax rate to 25% over the next ten years has the added benefit of improving the targeting of the R&D Tax Incentive towards small business.
Starting in the 2016-17 financial year, the small business tax rate will drop from 28.5% to 27.5%, increasing the effective net after-tax R&D benefit for businesses with a turnover of less than $10 million to 17.5%. Assuming the R&D offset rates remain the same over the next ten years, the net after-tax benefit for small businesses will continue to increase to 18% in 2024-25 financial year and 20% in the 2026-27 financial year.
Newly announced NISA initiatives
Support for the FinTech sector
In a move to provide additional assistance in supporting the growth of Australia’s financial technology (FinTech) industry, the Government is working with ASIC to propose a ‘regulatory sandbox’ to allow for start-ups and existing FinTech businesses to test their ideas for up to six months with a group of customers in a regulated environment. Specifically, this will provide start-ups who have limited funds to bypass the expensive and complex financial regulatory process, which allows them to focus purely on trialling their innovative products. Furthermore, the Government is also requesting feedback on how best to ensure FinTech start-ups can access the venture capital concessions.
Previously announced NISA initiatives
In addition to the newly announced initiatives, the following were re-announced:
- Tax incentives for investors in innovative start-ups, including:
- A 20% non-refundable tax offset on investment capped at $200,000 per investor, per year
- A ten year capital gains tax exemption for investments held for 12 months or more.
However under the proposal the incentive will be limited to investments in start-up companies that have expenditure of less than $1 million and income of less $200,000 in the previous income year. This initiative passed the House of Representatives on 3 May 2016
- Changes to employee share scheme rules which introduced tax concessions for employees of eligible start-up companies and reversed some of the unpopular changes which were made to the ESS tax laws on 1 July 2009, particularly in respect of options
- Relaxation of the same business test to facilitate access to carry forward losses where there has been a change in ownership
- Changes to depreciation rules for intangible assets to allow taxpayers to self-assess the tax effective life of acquired intangible assets
- Amendments to the Corporations Act to establish a regulatory framework to facilitate crowd sourced funding by small, unlisted public companies
- Changes to Venture Capital Limited Partnerships. Under the proposed arrangements:
- Partners in a new Early Stage Venture Capital Limited Partnership (ESVCLP) will receive a 10% non-refundable tax offset on capital invested during the year
- The maximum fund size for ESVCLPs will be increased from $100 million to $200 million
- ESVCLPs will no longer need to divest a company when its value exceeds $250 million
- The eligibility and investment requirements will be relaxed to allow managers to undertake a broader range of investment activities and greater diversity of investors
- Changes to insolvency laws including:
- Reducing the current default bankruptcy period from three years to one year
- Introducing a ‘safe harbour’ for directors from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company and include clauses in contracts that allow contracts to be terminated solely due to an insolvency event, unenforceable if a company is undertaking a restructure(‘ipso facto’ clauses)
- Establishment of a $250 million Biomedical Translation Fund
- Establishment of the new CSIRO Innovation Fund to support the early stage commercialisation of innovations from CSIRO, universities and other publicly funded research bodies
- Establishment of a $8 million fund for new and high performing incubators.
Changes to the Clean Energy Finance Corporation (CEFC)
- Adjusting the CEFC’s investment mandate to allocate $1.0 billion of the existing funding over the next ten years to the Clean Energy Innovation Fund for emerging clean energy technologies.
It is great to see the Government is serious about its agenda for innovation and science advancement. While we understand that the R&D Tax Incentive is still under review, the decision to leave the R&D Tax Incentive untouched provides Australian business with the confidence to continue to invest in R&D in the short term. This is particularly so for small businesses that will see an increase in the net after-tax benefit as a result of the reduction in the corporate tax rate.
We hope that the Government continues to provide this support for Australia’s innovators.