With recent media coverage dominated by the Federal Budget, the interest rate drop and Ted Cruz pulling out of the US election race you may have missed the passing of the Tax Laws Amendment (Tax Incentives for Innovation) Bill today.
This legislation is an exciting development for innovation in Australia and should definitely be on the radar for both innovative, early stage companies and investors alike. Outlined below is a short overview of what’s now possible under this legislation.
For Eligible Investors
The tax incentives introduced by this legislation are available to all types of investors (except widely held companies and their 100% subsidiaries), regardless of whether the investment is made directly as a corporation or individual, or indirectly through a trust or partnership (there is a 30% equity limit per investor and their affiliates). There is also no residency restrictions placed on the investing entities.
The tax incentives include:
- A 20 per cent non-refundable tax offset on investment capped at $200,000 per sophisticated investor, per year (non-sophisticated investors are limited to investments of $50,000 per company).
- A 10 year capital gains tax exemption for investments held for 12 months or more.
Early Stage Innovation Companies (ESIC’s)
Broadly a company will qualify as an ESIC if it’s an unlisted company, less than 3 years old, with total expenses of less than $1 million and assessable income of less than $200,000. Companies up to six years old may also qualify, however they are subject to more onerous expenditure restrictions (see the Bill for further clarification).
The company needs to be ‘engaged in innovation’ which is established via a combination of tests. Firstly there is a principles-based test to measure that the business relating to that innovation:
- Has the potential for high growth
- Has scalability
- Can address a broader than local market
- Has a competitive advantage.
As an alternative to satisfying this principles-based test, the legislation also introduces a ‘100 point innovation test’ whereby the company has to accumulate points according to a table of objective innovation criteria.
Further, companies who do not wish to self-assess as to whether they are involved in ‘innovation’, may be able to seek a ruling as to whether they can satisfy the innovation requirements.
With the Bill only just passing through parliament and the tax incentives expected to apply from 1 July 2016, there are clear opportunities to be had on both sides of the equation – generous tax concessions for investors and the opportunity for early stage innovative companies to level the playing field and reduce the negative bias against businesses that take risks and innovate, making them a more attractive investment option.
A concise analysis of this legislation has been undertaken by BDO and can be found here.
Should you be interested in further information about the impacts of this new legislation as an investor or innovative start-up company please don’t hesitate to contact me.