A cornerstone of this consultation is the definition of an innovation company. The Government is keen to hear from stakeholders on the appropriate definition of an innovation company and how the eligibility principles and criteria can leverage off existing industry concepts and business practices.
On 7 December 2015, the Government announced the National Innovation and Science Agenda (NISA), including new tax incentives for early stage investors.
The tax incentives will provide concessional tax treatment for investors through a non-refundable tax offset and a capital gains tax (CGT) exemption on investments that meet certain eligibility criteria.
The tax incentives are designed to encourage investment into Australian innovation companies (innovation companies) at earlier stages, where a concept has been developed, but the company may have difficultly accessing equity finance to assist with commercialisation. Separate initiatives have been announced relating to investment at later stages, including reforms to early stage venture capital limited partnerships (ESVCLP) and venture capital limited partnerships (VCLP). These separate reforms will apply from the 2016-17 income year.
The tax incentives for early stage investors measure is being developed in a way that is cognisant of these different stages of financing and the availability of other initiatives specifically targeted at companies at a later stage of development. The Government is mindful that innovation companies beyond a certain size should still be able to benefit from Australia’s existing venture capital regime.
The approach taken for the incentives has been informed by the work of other jurisdictions including the United Kingdom and Singapore, however the approach that has been developed is specific to the Australian economy and adapted to suit the Australian tax system. The Government is developing a principles-based approach to the design of the legislation for this measure that will help to ensure that the incentives continue to encourage investment into the future as technologies and business activities change.
OVERVIEW OF THE NEW TAX INCENTIVES
These incentives will provide eligible investors with a 20 per cent non-refundable tax offset for the amount paid for newly issued shares in an innovation company, where the amount is paid either directly to the innovation company or indirectly through a qualifying innovation fund. An investor can invest in innovation companies; innovation funds; or into both. As the offset is non-refundable, it will only be of immediate benefit where the investor has a tax liability. However, where an investor cannot use the tax offset in the relevant income year they may carry it forward to use in a future year. The tax offset will be available to both residents and non-residents.
There are a number of ways to define an innovation company. Adopting a principles-based approach will provide a conceptual framework and ongoing flexibility. This, in turn, will be supported by specific eligibility criteria (safe harbours or gateway criteria) to provide greater certainty for potential investors and innovation companies. It is also anticipated that specific exclusions will apply to activities that do not align with the policy intent of the tax incentives.
An eligible innovation company must meet the following criteria:
• was incorporated in Australia during the last three income years;
• had assessable income of $200,000 or less in the prior income year;
• had expenditure of $1 million or less in the prior income year; and
• is not an entity listed on any stock exchange.Investors will receive a non-refundable tax offset of up to $200,000 (on an affiliate-inclusive basis) for investments (direct or indirect) in eligible innovation companies in an income year. This means that for investments up to $1 million, investors receive the full 20 per cent non-refundable tax offset. Where the offset is carried forward and further eligible investments are made, the offset that may be claimed in any one year is capped at $200,000. Investment amounts greater than $1 million in an income year do not increase the amount of the offset available. Investments over $1 million still benefit from exempt capital gains, see below. The cap applies on an affiliate-inclusive basis in order to prevent entities entering into arrangements to circumvent the cap.
In addition to receiving a tax offset, investors (including a qualifying innovation fund) will not pay any CGT on gains from the disposal of shares in an innovation company provided those shares are held for at least three years. This applies to both resident and non-resident investors.
Where shares are held for more than 10 years, any incremental gain in value after 10 years will be subject to CGT and deemed to be on capital account. In this situation, the entity receives a first element of the cost base (or reduced cost base) equal to the market value calculated on the tenth anniversary of the date of acquisition.
Capital losses will be unavailable for shares issues as part of these tax incentives for early stage investors. In place of capital losses, immediate tax offsets are available subject to the income year offset cap. In order to achieve this result, the investor will initially treat the acquired shares as having a CGT reduced cost base of nil.
Closing date for submissions: Wednesday, 24 February 2016
