The following article originally appeared in the December 2015 edition of WTS Tax News Australia. I encourage you to read it and other useful articles in previous editions at the WTS Australia website. The article should be read in conjunction with the disclaimers published on this website and the WTS Australia website.
Prime Minister Malcolm Turnbull and Innovation Minister Christopher Pyne recently announced the flagship National Science and Innovation Agenda (Agenda), which is made up of a suite of business and
tax initiatives targeting innovation.
The Agenda, which is made up of a suite of proposed initiatives, represents perhaps the most significant policy announcement thus far of the new Turnbull Government. This article will briefly outline the initiatives that are of most relevance to entrepreneurs and investors.
Increasing access to company losses
Currently, in order to claim prior year tax losses, companies must satisfy either the ‘same business test’ or ‘continuity of ownership test’. The government proposes to relax the same business test, replacing it with a ‘predominantly similar business test’ that companies will be able to satisfy where their business, while not the same, uses similar assets and generates assets from similar sources. It is hoped that this will allow loss making companies to pivot and seek out new business opportunities to return to profitability. Legislation is expected to be introduced in the first half of 2016 and will apply to losses made in the current and future income years.
The government is proposing to change insolvency laws by reducing the bankruptcy period from three years to one, introducing a safe harbour for directors from personal liability for insolvent trading if they appoint a restructuring adviser and by making ‘ipso facto’ clauses unenforceable if a company is undertaking a restructure. An ipso facto clause allows contracts to be terminated solely due to an insolvency event. The government will release a proposal paper in the first half of 2016 with a view to the introduction of legislation in mid-2017.
Reforms to employee share schemes (ESS)
Earlier this year the government introduced tax concessions for ESS interests issued by start-ups (broadly those companies with an aggregated turnover not exceeding $50 million and incorporated for less than 10 years). Now it intends to pass a new law to limit the potential for disclosure documents given to employees under an ESS plan to be made available to the public (and therefore competitors). While ASIC has already published class orders providing partial relief from disclosure requirements, these do not apply in all circumstances. The legislation is expected to be introduced in the first half of 2016.
Intangible asset depreciation
Businesses will be provided the option to self-assess the effective life of acquired intangible assets (currently fixed by statute), thereby bringing the treatment of statutory intangible assets in line with tangible assets. It is hoped that this will decrease the cost of investment in these assets and enable smaller innovative companies to better market their intellectual property. The new arrangements will apply to intangible assets acquired from 1 July 2016
Tax incentives for early stage investors
New tax concessions will be provided for investors in unlisted companies that: undertake an eligible business (to be determined), were incorporated in the last three years and have expenditure and income of less than $1 million and $200,000 respectively. Where the investment qualifies, the investor will be eligible for a 20% non-refundable tax offset on investments, capped at $200,000 per investor per year, and a 10 year exemption on capital gains tax, provided investments are held for three years. The scheme is modelled on the UK’s Seed Enterprise Investment Scheme. The new arrangements are expected to apply from 1 July 2016.
Making it easier to access crowd-sourced equity funding (CSEF)
New laws will be introduced to enable companies to access crowd-sourced equity funding. Unlisted Australian public companies with turnover and gross assets of less than $5 million will be able to raise funds online (up to $5 million per year) from a large number of individuals. Companies that become public to access CSEF will receive up to a five year exemption from obligations to hold Annual General Meetings, produce audited financial statements and provide an annual report to shareholders. It is hoped that this will provide small innovative businesses with a more diverse range of funding options.
New arrangements for early stage venture capital limited partnerships
ESVCLPs are tax-effective investment vehicles in innovative companies at the early & growth stages of the start-up life-cycle. Under new arrangements, partners in new ESVCLPs will receive a 10% non-refundable tax offset on capital invested during the year. Furthermore, the maximum fund size for new ESVCLPs will be
doubled to $200 million and ESVCLPs will no longer be required to divest from a company when its value exceeds $250 million. It is hoped that this will make ESVCLPs more competitive internationally and attract greater levels of venture capital investment. The new arrangements are expected to commence from 1 July 2016.
The proposed measures are encouraging but, as they say, the devil is in the detail. At the time of writing, the Exposure Draft to the regulation to the CSEF regime (Corporations Amendment (Crowd-sourced Funding) Regulation 2015) only contemplates ‘ordinary shares’ and not other types of share instruments. This may present a limitation for new economy innovation projects. WTS will continue to provide updates as more information becomes available.
To read more about the Agenda business and tax incentives click here. (Tax News Australia 2015/6).