On 7 December 2015 the Prime Minister, Malcolm Turnbull, and Minister for Industry, Innovation and Science jointly announced the government's National Innovation and Science Agenda (NISA) to create a modern, dynamic, 21st century economy for Australia.
A number of tax measures to help drive economic growth and jobs for Australia are included in the NISA and summarised below.
Tax incentive for early stage investors
The Australian government will promote investment in innovative, high-growth potential start-ups by providing concessional tax treatment for investors, including:
- A 20% non-refundable tax offset on investments, capped at $200,000 per investor per year
- A 10 year exemption on capital gains tax, provided investments are held for three years
The incentive will be available for investments in companies that:
- Undertake an eligible business (scope to be determined in consultation with industry)
- Were incorporated during the last three years
- Are not listed on any stock exchange
- Have expenditure and income of less than $1 million and $200,000 in the previous income year respectively
How it will work in practice
Jessica is the founder of a start-up business called PaySmart Pty Ltd that is developing a software application to automate bill payments. She is looking to raise $200,000 in equity finance to continue developing the software.
Alex is an experienced early stage (angel) investor and believes that PaySmart has excellent growth potential. He invests $200,000 and claims a 20% non-refundable tax offset, reducing his tax payable by $40,000.
In addition to contributing capital, Alex uses his business skills to help PaySmart grow. He sells his shares for $400,000 four years later. As Alex has held the investment in PaySmart for the minimum three year period and less than 10 years, the full capital gain of $200,000 is exempt from capital gains tax.
Effective date
This incentive is expected to commence from 1 July 2016 as soon as the amendments receive Royal Assent.
Increasing access to company losses
The Australian government is reforming inflexible rules that prevent companies from claiming losses when they seek out new opportunities to innovate and grow. Under the new arrangements:
- The current 'same business test' will be relaxed to allow businesses to access past year losses when they have entered into new transactions or business activities
- A new and more flexible 'predominantly similar business test' will be introduced
- Under this 'predominantly similar business test' companies will be able to access losses where their business, while not the same, uses similar assets and generates income from similar sources.
How it will work in practice
RePloy Pty Ltd has developed a way to turn algae into biodegradable plastic. It incurs large initial expenditure on manufacturing equipment. In the first three years of operation, RePloy makes a loss.
To ensure its viability, RePloy brings in an early stage (angel) investor who contributes additional capital. This results in a majority change in ownership.
After this change, RePloy seeks to expand its business in an effort to reach profitability. This expansion allows RePloy to make a profit in year four. RePloy seeks to offset its past losses against current year profits.
Under the existing law, Reploy would fail to meet the 'same business test' and access to past losses would be denied.
Under the proposed new measure, RePloy would pass the 'predominantly similar business test' because it makes use of the same assets, generates the majority of its income from the same business, and took advantage of an opportunity a similarly placed business would take advantage of. As a result, RePloy would be able to access past year losses.
Effective date
Legislation is expected to be introduced in the first half of 2016. The 'predominantly similar business test' will apply to losses made in the current and future income years.
Intangible asset depreciation
The Australian government will provide businesses with a new option to self-assess the tax effective life of acquired intangible assets that are currently fixed by statute. This will better align tax treatment of the asset with the actual number of years the asset provides an economic benefit.
This means that the same tax treatment will be available for these intangible assets as is available for other types of assets.
This faster depreciation will make start-ups' intellectual property, as well as other intangible assets, a more attractive investment option.
Businesses will continue to have the option to use the existing statutory effective life.
How this will work in practice
Dane is the founder of InstaFilm Pty Ltd, a start-up that is developing a new app that allows users to easily edit and share high-definition movies taken with a smartphone. Dane purchases a patent over a new method for compressing data on a mobile phone.
The statutory life of the patent is 20 years but industry analysis provides evidence that the processor will only generate net cash inflows for five years.
Under the current law, the patent must be depreciated over 20 years.
Under the new arrangements, Dane can self-assess the patent's effective life to be five years. This allows Dane to claim a larger tax deduction over a shorter period than he would have been able to under the old arrangements.
Effective date
The new arrangements will apply to assets acquired from 1 July 2016.
More information
The government also announced a number of other initiatives as part of the NISA, including those that affect Venture Capital Limited Partnerships.
If you would like more information in relation to the NISA please contact our office on (02) 9894 8884.
