The Australian Government has recently introduced tax incentives\u00a0for early stage investors.<\/p>\n
The incentives have been introduced as the new Division 360\u00a0of the Income Tax Assessment Act 1997 entitled \u201cEarly Stage\u00a0Investments in Innovation Companies\u201d.<\/p>\n
The incentives apply from 1 July 2016 onwards.<\/p>\n
The Tax Incentives mean that investors in a qualifying Early Stage\u00a0Innovation Company (ESIC) will received a tax offset (a reduction\u00a0in tax) in the amount of 20% of their investment.<\/p>\n
A capital gains tax exemption is also available for investors\u00a0or investors who hold the relevant shares for at least 12 months.<\/p>\n
The Tax Offset<\/strong><\/span><\/p>\n The tax offset means that a person who invests say $100,000 in a\u00a0qualifying innovation company, will received a $20,000 tax offset\u00a0(meaning a reduction in tax) for the year of their investment.<\/p>\n The tax offset for the investor is capped at $200,000\u00a0meaning that investments above $1M will not attract any further\u00a0tax offsets.<\/p>\n The tax offset is non refundable, meaning that if an investor does\u00a0not have a tax liability in the year they make the investment they\u00a0will not receive any benefit. However, the benefit can be carried\u00a0forward and claimed in the next year when the investor has a tax\u00a0liability.<\/p>\n Who Can Claim the Tax Offset?<\/strong><\/span><\/p>\n The offset is generally claimable by all natural persons provided\u00a0they are considered sophisticated investors under section 708 of\u00a0the Corporations Act.<\/p>\n If the person is not considered a \u2018sophisticated investor\u2019 they are\u00a0only able to benefit from the tax offset if not more than $50,000\u00a0was invested by them. Investors can be either be resident or\u00a0non resident of Australia.<\/p>\n The offset is also available to investors who are are beneficiaries\u00a0of trusts to the extent that the relevant trust would have been\u00a0entitled to a tax offset if it was an individual. This would mean\u00a0that trusts that would need to satisfy the \u2018sophisticated investor\u2019\u00a0criteria, like an individual would, if it is seeking to invest more\u00a0than $50,000 into an ESIC.<\/p>\n The tax incentives were announced as part of the National Innovation and\u00a0Science Agenda. The new laws which were introduced as part of the Tax Laws\u00a0Amendment (Tax Incentives for Innovation) Bill 2016, received Royal Assent \u00a0 on\u00a05\u00a0<\/span>May 2016.<\/span><\/em><\/p>\n The Capital Gains Tax Concessions<\/strong><\/span><\/p>\n Essentially investor who qualify for tax incentives will receive\u00a0a capital gains tax exemption on gains arising from their\u00a0investment provided they hold the investor for at least 12\u00a0months and no longer than 10 years.<\/p>\n Where the investment is held for longer than 10 years the CGT\u00a0rules provide for a deemed acquisition of the investment for\u00a0CGT purposes on the 10 year anniversary of the investment\u00a0for the market value of the interest on that day. That means\u00a0that investors will receive the benefit of the CGT exemption for\u00a0accrued gains up to 10 years.<\/p>\n Note that investors receive no CGT concessions for any short\u00a0term gains made within 12 months. Section 360-40 defines an Early State Innovation Company\u00a0(ESIC). Essentially a company is an ESIC if it can satisfy all the\u00a0limbs of that section. The two main limbs are the if it can show\u00a0that it is: Is a company Early Stage?<\/strong><\/span><\/p>\n Generally, a company is early stage if either it is incorporated in\u00a0Australia within the last 3 years or it can have been incorporate\u00a0in the last 6 years if its total expenses over the last 3 years have\u00a0been not more than $1,000,000.<\/p>\n Is a company Innovative?<\/strong><\/span><\/p>\n Companies will qualify as innovative they can:<\/p>\n \u2022 Earn at least 100 points against the objective tests set The 100 Points Innovation Test<\/strong><\/span><\/p>\n Under 360-45 a company can calculate whether it can get to\u00a0\u2018100 points\u2019 by checking whether it has satisfied certain explicit\u00a0innovation criteria.<\/p>\n These are set out in Appendix A to this document.<\/p>\n The Principles Based Test<\/strong><\/span><\/p>\n A company will need to show that, it is<\/p>\n (i)<\/strong><\/span> the company is genuinely focussed on developing for 100 point innovation test<\/strong><\/span><\/p>\n At a particular time (the test time) in an income year (the current year), a company has the points mentioned in an item of the following table if that item applies to the company at that time.<\/p>\n Innovation points potentially available at that time in the current year<\/strong><\/p>\n (i) provides time-limited support for entrepreneurs with start-up businesses; and<\/p>\n (ii) is provided to entrepreneurs that are selected in an open, independent and competitive manner; and<\/p>\n (b) the entity providing that program has been providing that, or other accelerator programs for entrepreneurs,\u00a0for at least 6 months; and<\/p>\n (c) such programs have been completed by at least one cohort of entrepreneurs.<\/td>\n<\/tr>\n (b) the company issued those shares to one or more entities that:<\/p>\n (i) were not *associates of the company immediately before the issue of those shares; and<\/p>\n (ii) did not *acquire those shares primarily to assist another entity become entitled to a *tax offset\u00a0or a modified CGT treatment) under this Subdivision; and<\/p>\n (c) the company issued those shares at least one day before the test time.<\/td>\n<\/tr>\n (i) the patentee, or a licensee, of a standard patent; or<\/p>\n (ii) the owner, or a licensee, of a plant breeder\u2019s right;\u00a0granted in Australia within the last 5 years (ending at the test time); or<\/p>\n (b) the company has equivalent rights under a *foreign law.<\/td>\n<\/tr>\n (a) the company has rights (including equitable rights) under a *Commonwealth law as:<\/p>\n (i) the patentee, or a licensee, of an innovation patent granted and certified in Australia; or<\/p>\n (ii) the owner, or a licensee, of a registered design registered in Australia; within the last 5 years\u00a0(ending at the test time); or<\/p>\n (b) the company has equivalent rights under a *foreign law.<\/td>\n<\/tr>\n (a) an institution or body listed in Schedule 1 to the Higher Education Funding Act 1988(about institutions or bodies eligible for special research assistance); or<\/p>\n (b) an entity registered under section 29A of the Industry Research and Development Act 1986\u00a0(about research service providers); to \u00a0 co-develop and commercialise a new, or significantly improved,\u00a0product, process, service or marketing or organisational method.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Please contact me on matthew.marcarian@csttax.com for more information on how the new incentives might apply to your situation.<\/p>\n
\n
\nWhat is a Qualifying Early Stage\u00a0<\/strong>Innovation Company (ESIC)<\/strong><\/span><\/p>\n
\n(i)<\/strong> Early Stage<\/span>
\n (ii)<\/strong> Innovative<\/span><\/p>\n
\nout in section 360-45;
\n\u2022 Self-assess their circumstances against the principles based
\ntest; or
\n\u2022 Seek a ruling from the Commissioner about whether their
\ncircumstances satisfy the principles based test.<\/p>\n
\ncommercialisation one or more new, or significantly
\nimproved, products, processes, services or marketing or
\norganisational methods; and
\n(ii)<\/strong><\/span> the business relating to those products, processes, services
\nor methods has a high growth potential; and
\n(iii)<\/strong><\/span> the company can demonstrate that it has the potential
\nto be able to successfully scale that business; and
\n(iv)<\/strong><\/span> the company can demonstrate that it has the potential to
\nbe able to address a broader than local market, including
\nglobal markets, through that business; and
\n(v)<\/strong><\/span> the company can demonstrate that it has the potential to
\nbe able to have competitive advantages for that business.<\/p>\n\n\n
\n \u00a0 \u00a0 \u00a0 \u00a0Column 1<\/strong><\/td>\n Column 2<\/strong><\/td>\n<\/tr>\n \n Items<\/strong><\/td>\n Points<\/strong><\/td>\n Innovation Criteria<\/strong><\/td>\n<\/tr>\n \n 1<\/td>\n 75<\/td>\n At least 50% of the company\u2019s total expenses for the previous income year is\u00a0expenditure that the company can notionally deduct for that income year under section 355-205\u00a0(about R&D expenditure).<\/td>\n<\/tr>\n \n 2<\/td>\n 75<\/td>\n The company has received an Accelerating Commercialisation Grant under\u00a0the program administered by the Commonwealth known as the Entrepreneurs\u2019 Programme.<\/td>\n<\/tr>\n \n 3<\/td>\n 50<\/td>\n At least 15%, but less than 50%, of the company\u2019s total expenses for the previous\u00a0income year is expenditure that the company can notionally deduct for that income year under\u00a0section 355-205(about R&D expenditure).<\/td>\n<\/tr>\n \n 4<\/td>\n 50<\/td>\n (a) the company has completed or is undertaking an accelerator program that:<\/p>\n \n 5<\/td>\n 50<\/td>\n (a) a total of at least $50,000 has been paid for *equity interests that are *shares in the company; and<\/p>\n \n 6<\/td>\n 50<\/td>\n (a) the company has rights (including equitable rights) under a *Commonwealth law as:<\/p>\n \n 7<\/td>\n 25<\/td>\n Unless item 6 applies to the company at the test time:<\/p>\n \n 8<\/td>\n 25<\/td>\n The company has a written agreement with:<\/p>\n