Innovation tax incentives introduced

By Alexis Kokkinos - March 17, 2016

The government has taken the first steps in bringing its National Innovation and Science Agenda (NISA) to life by introducing into the Parliament the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016.

Despite the unimaginative name, its pages set out new laws that, if passed, will make innovation, risk-taking and entrepreneurship the cornerstones of future economic growth.

Two entity types in particular are the target of the new measures – Early Stage Innovation Companies (ESICs) and Early Stage Venture Capital Limited Partnerships (ESVCLPs). Both of these measures provide significant tax incentives for investors in eligible early stage entities.

ESICs

For ESICs, the new measures broadly provide a non-refundable tax offset for investors and an ability to sell shares CGT free.  These concessions only apply in relation to startup innovation companies, which generally include startup companies that meet the criteria of being “innovative” (as defined), and also have less than $200,000 turnover and $1M of expenses in the prior year.

An entity acquiring newly issued shares in an Australian ESIC may receive a non-refundable carry-forward tax offset of 20% of the value of their investment, subject to a maximum offset cap amount of $200,000, with a total annual investment limit of $50,000 applicable to non-sophisticated investors.
Investors can also disregard capital gains realised on shares in qualifying ESICs that have been held between one and ten years, but investors must disregard any capital losses realised on these shares held for less than ten years.

The tax incentives are designed to promote desired investment in innovative, high-growth potential start-up companies.   

ESCVLPs

With regards to ESVCLPs, a number of modifications have been introduced to make the new measures even more attractive for investors. The Bill will:

  • Introduce a non-refundable carry-forward tax offset for limited partners in ESVCLPs equal to up to 10% of contributions made by the partner in the ESVCLP during an income year
  • Increase the maximum fund size for ESVCLPs from $100 million to $200 million
  • Remove the requirement that an ESVCLP divest an investment in an entity once the value of the entity’s assets exceeds $250 million, but restricting tax concessions for such investments
  • Allow entities in which a ESVCLP, Venture Capital Limited Partnership (VCLP) or an Australian venture capital fund of funds has invested (the investee entity) to invest in other entities, provided that the investee entity that controls the other entity broadly satisfies the requirements to be an eligible venture capital investment
  • Allow an MIT to invest in an ESVCLP without breaching the public trading trust provisions, and allowing the capital account election to apply to the MIT
  • Address an anomaly in the current law so that tax free gains distributed to investors that are unit trusts are not otherwise taxed under CGT event E4

Pitcher Partners welcomes the proposed new measures, which will make starting and maintaining viable and competitive businesses in the emerging innovation and technology markets much easier for budding entrepreneurs.


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