Tax Incentives for Investment in Innovation
The Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016, received Royal Assent on 5 May 2016. It contains tax incentives to implement the Government’s “National Innovation and Science Agenda” by supporting innovation in Australian culture. It aims to support entities in the early stages of their development that are developing new or significantly improved innovations.
In summary, the Act contains the following tax incentives for early stage investors:
- a non-refundable tax offset equal to 20% of amounts paid for newly issued equity interests in an Australian early stage innovation company (ESIC). It is capped at $200,000 for each investor and their affiliates (combined) per year. In the case of non-sophisticated or retail investors, the tax offset is capped at $50,000 per year; and
- a CGT exemption for shares in an ESIC if it is held for between one and 10 years. If the shares are held for at least 10 years the investor receives a market value cost base on the 10th anniversary from the date of acquisition.
To be a qualifying ESIC the entity must satisfy the following tests:
a) the early stage limb test; and
b) the innovation limb test:
- principles-based test;
- points based test; or
- private ruling from the ATO in regards to the entity’s eligibility as an ESIC.
Potential investors need to closely consider the following qualifications:
- the tax incentives only apply to new shares in an ESIC which are issued on or after 1 July 2016;
- Preference shares are excluded;
- the investor or its ‘connected’ entities must not hold more than 30% of the equity interests in the ESIC; and
- the investor and the ESIC must not be “affiliates” of each other.
This Act offers a unique and exciting opportunity for investors to receive significant tax incentives if all the requirements are carefully considered and satisfied.
If you require any further information or advice in relation to investment strategies and the recent changes, please contact our team of financial planners and solicitors at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.