The Government’s National Innovation and Science Agenda was launched on 7 December 2015. Designed to stimulate business innovation in Australia, it includes a number of proposed tax reforms targeting start-up businesses, which we summarise below.
Tax incentives for investors
From 2016 onwards, start-up investment will attract a:
- 20% non-refundable tax offset based on the amount invested, capped at $200,000 per investor per year
- 10-year capital gains tax exemption for investments held for three years
The incentive targets companies that:
- Have incorporated during the last three income years
- Are not listed on any stock exchange
- Have expenditure of less than $1 million and income less than $200,000 in the previous income year
Increasing access to company tax losses
Currently, companies that experience a change in majority ownership can only use prior-year tax losses if they pass the same business test (SBT). To pass the test, a company must carry on the same business as it did when the losses were originally made. Generally this has been a very hard test to pass. If a company’s business has changed in any significant way since the losses were made, it was denied the loss. This discourages innovative businesses from seeking out new opportunities to book profit.
However from 1 January, the SBT will be replaced by a more flexible ‘predominantly similar business test’. This will allow companies to use prior-year losses even where minor changes in operations have occurred and is designed to allow loss-making companies to respond to commercial drivers without losing potentially valuable tax losses.
Changes to venture capital limited partnerships
Venture capital limited partnerships (VCLPs) are investment vehicles providing tax exemptions to those investing in companies in their early and growth stages. Effective from 1 July 2016, the reforms will make VCLPs more internationally competitive, with the intention of attracting greater investment.
- Partners in the new early-stage venture capital limited partnerships (ESVCLP) will receive a 10% non-refundable tax offset on capital invested in start-up companies
- The maximum fund size for new ESVCLPs will be increased from $100 million to $200 million
- ESVCLPs will no longer need to divest from a company when its value exceeds $250 million
Intangible asset depreciation
Innovative companies are likely to hold significant value in intangible assets like patents, trademarks and copyrights. These assets can be depreciating assets for income tax purposes with their cost written off over their useful life. This can lead to tax deductions being spread over 25 years in some cases. However, unlike tangible assets, taxpayers can’t self-assess the effective lives of acquired intangible assets.
From 1 July 2016, businesses will have the option to self-assess the tax effective lives of acquired intangible assets. This will better align the tax-effective life of an asset with its true effective life, and mean that tax relief may be obtained sooner in relation to assets innovative businesses have acquired, such as patents or copyrights.
Employee share schemes become more user-friendly
Employee share schemes (ESSs) allow employees to acquire shares or options, to buy shares, in their employer company as part of their remuneration. ESSs can be a tax-effective form of incentive for high-performing employees. However, the rules are complex and can be difficult to navigate. To address this, the requirement for disclosure documents given to employees under an ESS to be publicly available will be limited. This will allow otherwise non-disclosing companies to offer their employees shares without having to reveal commercially sensitive information to competitors
Grant Thornton’s view
We have been aware of the challenges facing dynamic, high-growth businesses for some time. In particular, the tax incentives for innovative business have lagged behind other tax jurisdictions, affecting the technology and media industry in particular in its ability to attract funding and high-calibre team members. Additionally, tax legislation has not kept pace with the changing nature of the tax landscape. For example, there are unresolved issues regarding the capitalisation of salary and wage expenditure to intangible assets versus the claiming of an upfront tax deduction. We therefore welcome incentives targeted at innovative businesses, but more could be done to encourage dynamic high-growth businesses:
- Increase the R&D tax incentive for innovative start-ups
- As currently drafted the law can lead to difficulties for software developers in claiming the R&D tax incentive as established software development methodologies do not take the form of a classic scientific experiment. The law should be amended specifically for software development activities in order to ensure that innovative developers are supported and encouraged
- Innovative companies may incur significant amounts of salary expenditure in relation to creating IP such as software that is capitalised to the balance sheet for accounting purposes; however, the law unclear in relation to the tax deductibility of that expenditure. Amended legislation or guidance from the Tax Office should be implemented to provide greater certainty for innovative businesses
- Introduction of a ‘patent box’ regime that allows for a lower tax rate to be applied to income from intellectual property in order to attract dynamic multinational business
For more information on the Government's National Innovation and Science Agenda and what it could mean for your business, contact your usual Grant Thornton adviser.
