Over the last couple of months, the media has been awash with opinion columns about the Federal Government’s Innovation Package.
With Australia lagging behind its peers on the Global Innovation Index (ranked 17th, it sits behind the UK, US, and New Zealand), the innovation package is designed to create a business culture that embraces risk and innovation and stimulates productivity.
Yet in spite of the press coverage and a new Government website, the information provided to date has been brief. Here’s our key take aways for Australian businesses.
Increased Access to Company Losses
Proposed changes to the company loss rules are expected to deliver greater flexibility to pursue new business activities or change the nature of a business.
Under the current rules, for a company to use past year losses to reduce taxable income, it must have maintained the same majority ownership from the time the loss was made to the time that the loss is utilised.
Companies that have seen a change in ownership must pass the Same Business Test (SBT). The SBT, however, has long been criticised as overly restrictive with the interpretation of ‘same business’ being very narrow. Companies that undertake new transactions or pursue new business activities are unable to pass the conditions of the test.
The changes, which are proposed to be introduced in early 2016, will see the introduction of a ‘predominantly similar business test’ which will allow companies to access prior year losses where their business, while not the same, uses similar assets and generates income from similar sources.
Under the proposed changes, the ‘no new transactions or business activities’ aspect of the SBT will also be removed.
Tax Incentives for Investment in High Potential Start-ups
With funding for start-ups in short supply, the Innovation Package introduces two new measures to encourage early stage investment.
20% Tax Offset for investors in start-ups
Tax incentives will be provided for investors in start-ups. A start-up is defined as an unlisted company that has been incorporated in the last three years, has expenditure of less than $1 million and has income of less than $200,000 in the last income year.
Investors will be entitled to:
- A 20% non-refundable tax offset on investments, capped at $200,000 per investor per year
- A 10 year exemption on capital gains tax for investments held for longer than 3 years.
10% Tax Offset for investors in Early Stage Venture Capital Limited Partnerships
Currently, a fund manager seeking to raise between $10 million and $100 million may be eligible to establish an Early Stage Venture Capital Limited Partnership (ESVCLP). Such partnerships may invest in growing businesses that meet the eligibility criteria set out by the Venture Capital Act. Registered ESVCLP’s allow for investors to receive a complete tax exemption from any return on those investments.
The proposed tax incentive will see investors in ESVCLPs receive an additional 10% non-refundable tax offset on capital invested throughout the year.
The maximum size of an ESVCLP will also increase from $100 million to $200 million and a partnership will have more flexibility around the size of investments it may hold.
Expected to come into effect on 1 July 2016, it’s anticipated that the changes will provide the encouragement required for both domestic and foreign investors to provide the seed capital for emerging high growth companies.
Changes to Bankruptcy laws
The Government has announced that the default bankruptcy period will be reduced from three years to one year. Additionally, should a company that is trading whilst insolvent appoint a restructuring advisor, its directors will be offered a safe harbour from incurring personal liability for the company’s debts.
Minimising the impact of business failure should encourage greater risk taking and innovation. However, the Government will need to ensure that in relaxing the bankruptcy laws, creditors remain protected.
Employee Share Scheme Reforms
Under the current Employee Share Scheme (ESS) rules, employers may (in some circumstances) be required to prepare a Disclosure Document and lodge it with the Australian Securities and Investments Commission (ASIC). These conditions can require otherwise non-disclosing entities to reveal commercially sensitive information to competitors.
The proposed changes will limit the level of disclosure required, which for some business could make implementing an ESS more attractive.
Self-Assessment of Intangible Asset Depreciation
Changes to the depreciation regime will allow businesses the ability to self-assess the tax-effective life of certain intangible assets. The option to self-assess will, in many cases, bring the tax effective life in line with the economic life of the asset.
Under the current regime, only certain intangible assets may be depreciated, such as patents, registered designs and copyrights.
However, unlike tangible assets, the rate at which eligible intangible assets are depreciated cannot currently be self-assessed. The tax-effective life of eligible intangible assets is currently set by statute.
The new measures, which will apply to all eligible intangible assets acquired after 1 July 2016, will allow businesses to self-assess their tax effective life. As a result, many assets may be depreciated faster, effectively bringing forward the tax deductions associated with them.