Government Releases National Innovation Statement
On Monday this week the Government released its National Innovation and Science Agenda. The primary motivation of this new Agenda is to incentivize innovation and entrepreneurship, reward risk taking, and promote science, maths and computing in schools. For any business owner, incremental innovation can be the path to increased income, productivity and efficiency.
We might be biased at UHY Haines Norton, but to us, the most exciting aspect of the National Innovation and Science Agenda is the suite of new tax and business incentive measures.
The Government is aiming to promote investment in small innovative businesses by providing concessional taxation treatment for investors in two ways.
20% NON-REFUNDABLE TAX OFFSET BASED ON THE AMOUNT OF AN INVESTMENT INTO INNOVATIVE STARTUPS
The first way is to provide a 20% non-refundable tax offset on an investment in a small innovative business.
The following example will illustrate how this will work in the real world:
A small innovative business attracts the attention of someone to invest in their company, and that investor invests (say) $200,000 in equity finance for the business. The investor claims a 20% non-refundable tax offset, reducing his / her income tax by $40,000.
To claim this non-refundable tax offset, 4 tests must be passed:
- Small Innovative Company undertakes an eligible business. An “eligible business” is still to be determined, after discussion and consultation with industry.
- The company was incorporated within the last 3 income years.
- The company is not listed on any stock exchange.
- Company has expenditure of less than $1M and income of less than $200,000 in the previous income year
When: 1 July 2016
CAPITAL GAINS TAX EXEMPTION FOR INVESTMENTS HELD FOR MORE THAN 3 YEARS AND LESS THAN 10 YEARS
The second approach to promoting concessional tax treatment for investors is to provide a capital gains tax exemption on the sale of the investor’s shares in the Small Innovative Company.
There is an extra test, in addition to the 4 tests mentioned above.
Shares in the Company must be held by the investor for more than 3 years, and less than 10 years. While it is not clear from the Government’s documentation, it would appear that the 4 tests mentioned earlier are applied at the time that the investor acquire its equity in the small innovative company.
When: 1 July 2016.
CARRY FORWARD TAX LOSSES: RELAX THE “SAME BUSINESS TEST” TO A MORE FLEXIBLE “PREDOMINANTLY SIMILAR BUSINESS TEST”
Like many businesses just starting out, small innovative businesses may suffer losses in their early years. Therefore, offsetting these carry forward tax losses against future profits is an important consideration. If operating through a company, the business first attempts to pass a “continuity of ownership” test. For a small innovative business, this test may prove difficult – particularly if the business needs to attract outside capital to fund the ongoing development of its innovation.
If the first test is not passed, then the business needs to pass a very strict “same business” test. The National Innovation and Science Agenda reforms will relax this severe test to a more flexible and accessible “predominantly similar business” test, with the idea that small innovative businesses will find it significantly easier to use any carry forward income tax losses.
When: the “predominantly similar business” test will apply to losses made in the 2015/6 and future income tax years.
REMOVE LIMITATIONS ON DEPRECIATION DEDUCTIONS FOR SOME INTELLECTUAL PROPERTY SO THAT THEY CAN BE DEPRECIATED OVER THEIR STATUTORY LIVE INSTEAD OF THEIR ECONOMIC LIFE
Currently the tax depreciation rates for intangible assets (i.e.: intellectual property) is based on a statutory effective life, for example, 20 years for a standard patent and up to 25 years for a copyright or copyright licence. Increasingly rapid technological development has meant that the intellectual property will frequently be obsolete well before the development and acquisition costs are fully written off for income tax purposes.
The Government proposes that the cost of intangible assets that are “acquired” from 1 July 2016 can be written off over self-assessed effective lives. This will decrease the after tax cost of holding these assets.
REDUCED ASIC DISCLOSURE REQUIREMENTS FOR START UP EMPLOYEE SHARE SCHEMES
The Federal Government will reduce the Corporations Act disclosure requirements for documents to be given to employees under an Employee Share Scheme (ESS). This means confidential company information, including future plans, will not be made available to the public. The Government will also consult with industries on options to amend the disclosure requirements to make ESS more user-friendly.
Under an ESS, shares or options to buy shares in the company are provided to an employee in relation to their employment. An ESS aligns employee interests to those of the company. This is because they share in the company’s success. Given the potential to share in profits down the track, an ESS may offer a more attractive remuneration package than a straight cash salary.
ESS interests are commonly offered in the information technology and similar industries. Recent tax changes have reduced the compliance issues for employers and the upfront tax burden for participating employees.
This new proposal represents a move away from high levels of investor protection for employees acquiring ESS interests. The change should also reduce compliance costs for companies offering those interests.
Relevant amending legislation is expected in the first half of 2016.
CHANGES TO INSOLVENCY LAWS
The balance between risk and reward in the space of a small innovative business is always tricky. The Government wishes to change the insolvency law “to encourage entrepreneurship and innovation”. The Government is contemplating introducing these changes, after the release of a proposal paper, in mid-2017.
The changes are three-fold, and only relate to small innovative businesses:
- Reduction of the current default bankruptcy period from three years to one year.
- Exclude directors from their exposure to personal liability for insolvent trading IF they appoint a restructuring adviser to develop a turnaround plan for the company.
- Making breaches, which cause a contract to terminate because of an insolvency event, unenforceable IF the company is undertaking a restructure.
EASIER ACCESS TO CROWD SOURCE EQUITY FUNDING
Small innovative businesses and entrepreneurs can raises funds online (via Crowd Sourced Equity Funding) from a large number of individuals in return for equity in their company. Current legislation means that the small innovative business would need to hold Annual General Meetings, produce audited financial statements and provide an annual report to the shareholders.
Legislation to provide a 5 year exemption on these obligations for small innovative businesses was introduced into Parliament on 3 December 2015.
The legislation applies to public (but not listed) companies; who have annual turnover and gross assets of less than $5M; and where the crowd sourced investors are individuals who contribute up to $10,000 per year, per company.
Importantly, this legislation is consistent with Crowd Sourced Funding in countries such as New Zealand and the UK.
When: Within 6 months of Royal Assent.