The Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 was introduced in the House of Reps on Wed 16.3.2016. It proposes the following amendments.
Early Stage Innovation Company amendments to the ITAA 1997 to encourage new investment in Australian early stage innovation companies with high growth potential by providing investors, who invest in such companies, by providing tax incentives. These amendments form part of the tax incentive for early stage investors measure.
There will be tax incentives to encourage innovation via these entities.
- There will be a 20% carry-forward non-refundable offset on investments capped at $200,000 per year. The tax offset will be available upon investment, not when the funds are used by the innovation company.
- There will also be a 10-year exemption on CGT for investments held in the form of shares in the innovation company for at least 12 months, provided that the shares held do not constitute more than a 30% interest in the innovation company. , and any sale of the shares will be taxed on a “deemed capital account” basis.
To qualify for these incentives, the investment must be in an ‘Early Stage Investment Company’ – broadly, unlisted, less than 3 years old, $220k or less assessable income in the previous year and $1m or less in total expenses in the previous year (see extract below from the EM about the meaning of an ESIC).
There are no investment limits on ‘sophisticated investors’ under s708 of the Corporations Act 2001 (save for the $220k investment limit for the tax offset). Other investors will have a $50k limit [Schedule 1, item 1, section 360-20]. [EM paras 1.19 & 1.21]
DATE OF EFFECT: These amendments would apply in relation to shares issued on or after the later of 1 July 2016 or Royal Assent.
The early stage venture capital limited partnership (ESVCLP) and venture capital limited partnership (VCLP) regimes within the Venture Capital Act 2002 and ITAA 1997 will be amended to improve access to venture capital investment and make the regimes more attractive to investors. The amendments provide an additional tax incentive for limited partners in new ESVCLPs, relax restrictions on ESVCLP investments and fund size and clarify the legal framework for venture capital investment in Australia. Under the changes, there would be:
- a non-refundable tax offset of 10% of the value of new capital invested into early stage venture capital limited partnerships during the income year;
- an increase in the maximum fund size of early stage venture capital limited partnerships from $100 million to $200 million;
- improved access to funding from managed investment trusts; and
- broadened and simplified rules for both venture capital limited partnerships and early stage venture capital limited partnerships.
DATE OF EFFECT: The amendments would broadly apply on and after 1 July 2016. However, the ESVCLP tax offset will be available for any qualifying contributions made to ESVCLPs that become unconditionally registered on or after 7 December 2015 ie the date the measure was announced in the Government’s Innovation Statement.
The EM answers the question: ‘What is an Early Stage Investment Company (ESIC)?’ [paras 1.61 to 1.70]
Generally, an Australian-incorporated company will qualify as an ESIC if it is at an early stage of its development (the early stage limb) and it is developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return (the innovation limb). Specific, objective threshold tests apply to determine if the company is at an early stage of its development whereas a combination of tests may apply to determine if the company is developing a type of innovation. These different tests recognise that whilst objective tests are easier to apply in Australia’s self‑assessment income tax system, companies may be innovating in a variety of different ways and so may need to apply a combination of different tests depending on their circumstances.
The early stage limb – A company must pass four tests to satisfy the early stage limb of the qualifying ESIC test. Each of these tests is discussed below.
(1) It has been recently incorporated or registered in the Australian Business Register
- must have been incorporated in Australia within the last three income years (the latest being the current income year at the test time); or
- if it has not been incorporated within the last three income years — then it must have been registered in the Australian Business Register (ABR) within the last three income years (the latest being the current income year at the test time); or
- if it has not been registered in the ABR within the last three income years — then:
- it must have been incorporated in Australia within the last six income years; and
- it and any wholly-owned subsidiaries must have incurred expenses of no more than $1,000,000 in total across all of the last three income years (the latest being the current income year at the test time).
[Schedule 1, item 1, paragraph 360-40(1)(a)]
The ATO’s company tax return requires companies to report ‘total expenses’ at item six as part of the total profit or loss calculation. A company that has submitted a company tax return in the previous income year must rely on the amount reported in item six for the purposes of this test. Alternatively, if the company was not required to submit a company tax return, it may use the amount corresponding to this item.
A company that does not meet any of these three requirements will not qualify as an ESIC.
(2) It has total expenses of $1 million or less in the previous year
The company and any of its wholly-owned subsidiaries must have not incurred ‘total expenses’ (as explained in paragraph 1.64) of more than $1,000,000 in the previous income year. [Schedule 1, item 1, paragraph 360-40(1)(b)]
(3) It has assessable income of $200,000 or less in the previous year
The company and any of its wholly-owned subsidiaries must have derived assessable income of no more than $200,000 in the previous income year. [Schedule 1, item 1, paragraph 360-40(1)(c)]
Companies that had no assessable income in the previous income year will satisfy this test.
In determining the company’s assessable income, the company may disregard the value of an Accelerating Commercialisation Grant it received in that year (refer also to paragraph 1.93). [Schedule 1, item 1, subsection 360-40(2)]
(4) It is not listed on a stock exchange
The company must not be listed on any stock exchange (either in Australia or overseas). These tax incentives target companies experiencing difficulty accessing equity finance and without access to fundraising via listed securities. [Schedule 1, item 1, paragraph 360-40(1)(d)]