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Is the next boom about to happen?

Innovation: Is there a boom about to happen?

Start-ups and their subsequent investors could both be winners if proposed tax changes for early stage innovation companies are legislated.

The Federal Government has signalled plans to change tax structures with the introduction of the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 to Parliament last month.

The move is designed to incentivise investment in early stage innovation companies (ESICs) by offering capital gains tax exemptions and tax offsets.

Ernst & Young Transaction Tax Director Dragan Misic, said if the innovation tax incentives were enacted, they would help provide additional funding to the sector.

“This will help drive an innovation boom.

“The impact will only be felt once the funding starts rippling through the wider innovation ecosystem by encouraging some risk-taking, new ideas, entrepreneurship and eventually jobs,” he said.

During the second reading of the bill in Federal Parliament last month, Treasurer Scott Morrison said the move would help encourage innovation, risk-taking and an entrepreneurial culture in Australia.

“It is backing the risk-takers to be the growth-makers in our economy,” he said.

“Within the early stages of an innovation company's financing life cycle, difficulty attracting funding can prevent entrepreneurs from developing and commercialising their ideas.

“It is important that the government help connect business expertise with entrepreneurs so that innovative ideas can reach the market through commercialisation.”

What are the proposed changes?

According to Innovation Australia (IA), 4,500 start-ups miss out on equity finance each year.

IA stated on its website the aim of the changes were to provide concessional tax treatments for investors, including:

  • A 20% non-refundable tax offset on investment capped at $200,000 per investor, per year
  •  A 10 year capital gains tax exemption for investments held for 12 months or more

The scheme is expected to come into effect from 1 July 2016.

The changes would also require ESICs to report on specific innovation related investments and provide a way for Innovation Australia to give guidance on investment activities.

Mr Morrison told Parliament two key features would be implemented by the Bill.

  • An amendment to the Income Tax Assessment Act 1997  to incentivise investors to assist entrepreneurs to commercialise
  • An amendment to the Venture Capital Act 2002 and the Income Tax Assessment Act 1997 to reform the arrangements for venture capital investments

What does it all mean?

Misic said as an election was on the horizon and the innovation measures had not yet been enacted, investments are likely being held back until the matter is resolved.

He added that the new measures could help investors make the leap by mitigating some of the risk in providing seed funding.

“Investors will definitely be factoring in the availability of the new incentive in calculating their investment returns.

“Early stage companies will be ensuring that they meet all the requirements to attract this new source of capital and will seek to provide assurance of this to prospective investors to provide them a competitive edge in fund-raising,” he said.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Commonwealth Bank is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.