Tax incentives for early stage investors in innovation companies

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:

1. The early stage limb – the company must be in the early stage of its development. A company will satisfy this limb if:
   1. it has been recently incorporated or registered in the Australian Business Register; and
   2. it has total expenses of $1 million or less; and
   3. it has assessable income of $200,000 or less; and
   4. it is not listed on a stock exchange.
2. 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:
   1. fulfil a principle-based definition (which takes into account matters such as the company’s potential for high growth); or
   2. 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

ESIC Directory

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: 

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