For example, investors in start-ups will be able to reduce their tax bill by up to $40,000 and sell out, capital gains tax-free, after three years.
Start-up companies that invest those funds in eligible research & development (R&D) can then cash out up to 45 cents in the dollar under the existing R&D Tax Incentive.
On a $200,000 investment, the investor would get $40,000 and the start-up would get $90,000 if all of the invested funds are spent on eligible R&D.
These measures could be a real boost to growth – not only do they directly benefit both startup and investor, but high wealth investors are likely to bring entrepreneurial expertise, mentorship and support to an under-funded start-up sector.
Western Sydney businesses have a well-deserved reputation for entrepreneurship. Many of our successful businesses started with great ideas followed up by hard work and business acumen.
The Western Sydney Innovation Corridor has been established to provide businesses with access to science and technology.
New and established entrepreneurs can benefit from NISA by being strategic with their tax planning and business growth models.
This article highlights some opportunities for entrepreneurially-minded business people.
New tax incentives to encourage investments in start-ups
The proposed scheme will promote investment in new start-ups by providing investors with:
• A 20 percent non-refundable tax offset on investments, capped at $200,000 per investor per year; and
• A 10 year exemption from capital gains tax provided investments are held for at least three years.
This will be available for investments in companies that:
• Undertake an ‘eligible’ business;
• Were incorporated during the last three income 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.
The final definition of ‘eligible’ business will be developed by government with industry collaboration and the advice of Innovation and Science Australia.
Even though the start-up investment scheme will not begin until July 2016, recently established and start-up companies should begin to work on their investment and R&D strategy now.
R&D tax incentives – super charge investments in start-ups
Under NISA, the R&D Tax Incentive will remain (the Bill to reduce the benefit has been dropped). Nonetheless, its $3 billion cost to the public revenue means it will be reviewed carefully and we expect further refinements to be made after the current review concludes.
The Incentive is designed to offset the cost of experimental activities intended to create new or improved products, processes and services.
In the case of companies with group turnover under A$20 million, a 45 percent refundable tax offset is available which has been a lifeline for many companies taking innovative risks to develop new or improved products and services.
NISA shows that a ‘whole of government’ approach is being taken to innovation and science – a welcome trend to create the businesses and knowledge jobs of the future.
Reflecting this premise, the new Innovation and Science Australia will review the Incentive, Australia’s innovation system and related policies. The climate for investing in science based new businesses is the best it has ever been.
Other tax changes
Venture capital improvements
Australia’s venture capital market for larger and earlier phase investees has been growing.
Tax changes to the tax treatment of Early Stage Venture Capital Limited Partnerships (ESVCLPs) aim to attract more investment into higher potential start-ups. Under the new arrangements:
• Partners in a new ESVCLP will receive a 10 percent non-refundable tax offset on capital invested during the year.
• The maximum fund size for new ESVCLPs will be increased from $100 million to $200 million.
• ESVCLPs will no longer be required to divest a company when its value exceeds $250 million.
The tax rules will also relax eligibility and investment requirements to allow managers to undertake a broader range of investment activities and to attract more diverse investors.
Patent and intangible faster tax write offs - a new option to self-assess the tax effective life of acquired intangible assets (currently set by Government) based on the actual number of years the asset provides an economic benefit.
Carry forward tax losses - 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 through a ‘predominantly similar business test’ where their business, while not the same, uses similar assets and generates income from similar sources.
Government support for collaboration
Whilst the R&D Tax Incentive has not been changed to specifically incentivise collaboration, the new Innovation Connections program will invest $18 million to expand and relaunch the existing Research Connections scheme to:
• Provide additional facilitators so that more businesses can access Australia’s innovation infrastructure, particularly in regional Australia.
• Make matched grants available to support graduate and postgraduate researchers being placed in businesses and vice-versa.
• Identify opportunities to access research and development and testing facilities and develop specialised training options by working more closely with the vocational education and training sector.
Business in Western Sydney is fortunate that programs such as Western Sydney University Launch Pad and their REDI program provide access to technology and talent made bearable by the fact that they have an open IP policy (i.e. corporate participants keep the IP from collaborative developments).
New businesses including new technologies from existing private
These benefit from infrastructure and government support through the education and research sector. Participation in facilities such as Western Sydney University Launch Pad provides cost effective access to bright minds, computational power and facilities. It also supports claiming R&D tax incentives.
Conclusion
Western Sydney entrepreneurs have a unique opportunity to start new businesses or support them. Whilst NISA focuses on the start-up sector, investors and established companies now have a new investment class and options for creating new businesses.
The preservation of the R&D tax incentive is welcome as it encourages businesses to harness technology to create business models with unique value propositions.
AUTHORS: Paul Van Bergen is a partner specialising in R&D tax incentives and government. David Pring is managing partner and focuses on tax and financial advice for growing private companies.
