The Australian Government has tabled the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 (Bill) to amend the Income Tax Assessment Act 1997 (Cth) (ITAA). The purpose of the Bill is to encourage innovation and foster an entrepreneurial and risk taking culture. According to the summary of the first reading of the Bill it seeks to address the difficulties faced in raising capital by many Australian Early Stage Innovation Companies (ESICs), by connecting relevant start-ups with investors that have both the requisite funds and business experience to assist entrepreneurs in developing successful and innovative companies.
What changes does the Bill propose?
The Bill creates a new Subdivision 360-A ‘Tax incentives for early stage investors in innovation companies’, of the ITAA which allows entities that acquire newly issued shares in a qualifying ESIC to receive a non-refundable carry-forward tax offset of 20 per cent of the value of their investment subject to a maximum offset cap of $200,000. In addition, investors may disregard capital gains realised on shares in qualifying ESICs that have been held for between one (1) and ten (10) years, and must disregard any capital losses realised on these shares held for less than ten (10) years.
What investments qualify for the scheme?
Qualifying investors must invest directly, or through a company, trust or partnership in qualifying shares of the ESIC. Qualifying shares are newly issued equity interests in the ESIC. Whilst there are no restrictions on the investor’s residency, the investor must not be affiliated with the ESIC.
Moreover, there is total annual investment limit of $50,000 for retail (non-sophisticated) investors. Moreover, the investor must not be affiliated with the ESIC.
What is a qualifying ESIC?
Qualifying ESICs are Australian-incorporated companies that pass a two-limb test:
- The early stage limb – the company must be in the early stage of its development. A company will satisfy this limb if:
- it has been recently incorporated or registered in the Australian Business Register; and
- it has total expenses of $1 million or less; and
- it has assessable income of $200,000 or less; and
- it is not listed on a stock exchange.
- The innovation limb – the company must be developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return. To satisfy this test, a company can either:
- fulfil a principle-based definition (which takes into account matters such as the company’s potential for high growth); or
- have at least 100 points for meeting certain objective activity-based criteria.
If enacted when will the amendments commence?
The Bill is proposed to commence on 1 July 2016. In four (4) years the Government aims to review the tax incentive to determine if it is delivering on its policy outcomes. There may even be scope to extend the incentive to indirect investments through an Australian Innovation Fund, depending on stakeholder feedback.
Links and further references
Legislation
Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016
Income Tax Assessment Act 1997 (Cth)
Other links
Further information about corporate law
If you need advice to ensure that an investment in your early stage investment company is likely comply, contact us for a confidential and obligation-free discussion:
Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
T: +61 7 3221 0013 (preferred)
M: +61 419 726 535
E: mburrows@dundaslawyers.com.au
Disclaimer
This article contains general commentary only. You should not rely on the commentary as legal advice. Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.
Related insights about corporate law
-
Holding company responsibility for subsidiary debts
Uncover the factors that affect a holding company’s liability for its subsidiary’s debts. Learn when a holding company can be liable and what defences are available to protect it.
-
ASIC v Macdonald – have the lessons really been forgotten?
The case of Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287 highlights the importance of properly documenting Directors’ meetings to ensure they are legally compliant. This article examines the facts of the case, the basis of The Australian Securities and Investments Commission’s argument, and the principles of preparing minutes of Directors’…
-
The Crowd-sourced Funding Bill 2016 – overview
Revised from the 2015 Bill, the 2016 Bill provides a regulatory framework for Crowd Sourced Funding (CSF) with eligibility requirements, obligations for Intermediaries facilitating the CSF Offers, and restrictions on advertising to protect retail investors.
-
Shadow directors and de facto directors explained
This article examines the legal reality of de facto directors and shadow directors, which go beyond those validly appointed. It also considers whether advisory board members can be classed as such, and the implications of this status, with reference to relevant case law.
-
Refund obligations for Australian businesses
In Australia, the main piece of legislation governing the supply of goods and services is the Competition and Consumer Act 2010 (Cth) (CCA), which incorporates the Australian Consumer Law (ACL) in Schedule 2. These obligations apply in addition to the terms and conditions by which a business trades. The CCA regulates the interaction between businesses…
-
Are legal expenses tax deductible for new start-ups?
From 1 July 2015, a newly incorporated company, trust or partnership can immediately deduct a range of professional expenses associated with starting a new business, such as professional, legal and accounting advice. This change was introduced by the Tax Laws Amendment (Small Business Measures No. 3) Act 2015 (Cth) which amended the Income Tax Assessment…
-
ACCC guide for platform operators updated
The Australian Competition and Consumer Commission has released a Guide to help Platform Operators in the Sharing Economy understand their legal obligations. Learn more about the four key principles, terms and conditions, policies and pricing obligations.
-
“Approved by ASIC” – a $20,000 issue
The Australian Securities and Investments Commission has taken action against Huntley Management Limited for advertising their products in a way that could mislead consumers. Learn more about this case and what it means for Australian Financial Services Licence holders.
-
What are Share Subscription Agreements?
A share subscription agreement is a binding promise between a potential shareholder and a company. It outlines the number of shares issued, order and timing of funds advanced,along with common clauses such as conditions precedent, confidentiality, no-shop, and more.
