Tax Incentives for Start-Ups and Early Stage Investors
Among the more concrete initiatives in the Prime Minister’s National Innovation and Science Agenda released on 7 December 2015 (“Agenda”) are changes to the tax law to:
- increase access to company carry-forward losses;
- make Venture Capital Limited Partnerships (“VCLPs”) and Early Stage VCLPs (“ESVCLPs”) more attractive to investors;
- align the depreciation treatment of intangible assets with other assets;
- alleviate privacy concerns for participants in employee shares schemes (“ESSs”); and
- provide tax-offset and CGT exemption concessions for early stage investors.
The new rules are intended to apply from the latter half of 2016. Entrepreneurs commencing or carrying on a recently commenced enterprise should familiarise themselves with the eligibility requirements to ensure access.
Increasing access to carry-forward losses
Currently, a company may only offset prior year losses against current year income if throughout the relevant period it:
- is majority-owned by the same persons; or
- carries on the “same” business.
The “same business” requirement in the second of these tests will be relaxed to “predominantly same business”, which will be satisfied by a company which changes its business, but uses similar assets and continues to generate income from similar sources.
Companies will thus not be discouraged from “pivoting” towards new business opportunities.
Making VCLPs and ESVCLPs more attractive
Participants in VCLPs and ESVCLPs presently enjoy certain tax advantages, such as a CGT exemption where a range of conditions are satisfied.
As announced in the Agenda:
- the types of investors allowed to participate and the range of activities in which the partnership may invest will be widened;
- partners in a new ESVCLP will receive a 10% non-refundable tax offset on capital invested during the year;
- the maximum fund size for new ESVCLPs will be increased from $100 million to $200 million; and
- ESVCLPs will no longer be required to sell an investment in a company when its value reaches $250 million.
Aligning the depreciation treatment of intangible assets
“Intangible” assets (such as intellectual property) are currently allocated a statutory “effective life” over which they must be depreciated. For example, deductions for assets registered under patent must be spread over 20 years.
The proposed new law will allow an asset-holder the choice to self-assess the “effective life” of the asset rather than rely on the statutory period.
For example, the owner of a patent which industry analysis suggests will only generate positive cash flows for 5 years will be able to write off the cost of the asset over that period.
Alleviating privacy concerns for ESS participants
Following on from the 2015 changes enabling employee option-holders to delay tax until exercise (see our earlier article) the Government now proposes to limit public availability of disclosure documents provided on the issue of ESSs and generally make schemes “more user-friendly”.
Presently, unless the issue of interests to employees is covered by:
- one of the exemptions in s 708 of the Corporations Act (such as those for small scale offerings, or offers to senior managers or sophisticated investors); or
- ASIC Class Order 14/1001, which relieves unlisted companies from disclosure requirements provided the offer is within relatively restrictive prescribed limits,
- a company may be required to prepare and lodge disclosure documents (such as a prospectus) before offering shares or options to its employees.
Currently, such documents are available to the public and may contain commercially-sensitive information, which may be of particular concern for smaller companies and start-ups. The proposal is that such documents will no longer be available to the public.
As mentioned in our article, ESSs may particularly benefit “cash poor” start-ups.
Tax offsets and CGT exemptions for early stage investors
Though falling short of concessional measures employed by other jurisdictions (such as the UK’s “patent box” regime) the Agenda says that investors are to be provided with:
- a 20% non-refundable tax offset capped at $200,000 per investor per year; and
- a 10 year CGT exemption on investments held longer than 3 years.
As announced, the incentives will be available on investments in companies which:
- undertake an eligible business (which is yet to be defined);
- were incorporated in the last 3 income years;
- are unlisted; and
- have expenditure of less than $1 million and income of less than $200,000 in the previous income year.
The changes are welcome as (it is noted) they go some way towards providing Australian entrepreneurs with some of the advantages enjoyed by their foreign counterparts (particularly those in the EU) for some years.
Potentially eligible businesses should examine their current or intended business structures prior to 1 July 2016 with a view to ensuring access to every concession to which they are entitled.