With recent coalition announcements we will detail the latest in government assistance for innovative companies including the Employee Share Scheme and the Angel Funding tax break.
In September 2015 the prime minister of Australia changed, and with it came a change in the approach to innovative companies. In the very first public speech by Malcolm Turnbull as Prime Minister, he presented a vision of an Innovative Australia. He said “The Australia of the future has to be a nation that is agile, that is innovative, that is creative. We can’t be defensive, we can’t futureproof ourselves. We have to recognise that the disruption that we see driven by technology, the volatility in change is our friend if we are agile and smart enough to take advantage of it.”
In the past few months we have seen the first glimpses of how Malcolm intends to increase the viability of the innovative sector. Going forward we expect that there will be further announcements from both the Coalition Government and the Labor Opposition leading up to the 2016 Federal election. However today we’ll go though the key innovative proposals of the existing government that would affect innovative businesses.
Angel Funding Tax break
A white paper has been released by the Coalition government detailing a proposed Angel Tax Break. Based on what has been released in the white paper this won’t be a tax break for a startup like the R&D Tax Incentive is, it is instead a tax break for the investors themselves and will ultimately be applied against an individual tax return.
There are two entities that can take advantage of this tax benefit, a qualifying fund and a qualifying individual:
Is vehicle set up which must be a flow through for income tax purposes and invests exclusively in qualifying startups. These will need to be set up to specifically to take advantage of this tax benefit.
Is an Individual Investor who directly invests in startups. There could be a restriction on who could qualify which might limit it to those earning $250,000 per annum or who have a net worth of $2.5m.
The Proposed Benefits
It is proposed that the government will offer a non refundable 20% tax credit based on up to $1,000,000 in investment. How would this work, if an eligible investor invested $1,000,000 in a qualifying startup, they would receive a tax credit of $200,000 which would directly reduce their personal income tax bill by that amount.
The government will also offer Capital Gains Tax advantages on the investment as well. A capital gains tax(CGT) exemption is available where the investment is held for at least 3 years. The capital gains exemption will cover the first 10 years of investment, at which point the cost base of the shares will be reset to market value.
Who will this benefit?
- Startup investment funds
- Larger investors
1 July 2016
How might this affect the R&D Tax Incentive
Generally the boost in investment funds would have a flow on effect of boosting the amount spent on Research and Development which should increase claim sizes. At this early stage we don’t believe a clawback which could limit the effect of the R&D Tax Incentive, would be applicable where the investment funds are used for R&D. However we’ll investigate this further as more information is released.
This is still a proposed benefit, if you would like to provide feedback, please do so at:
One area that the startup community is expressing dissatisfaction is with the Qualifying Individual Restrictions, which many believe will disadvantage smaller investors. For further information please see the governments White Paper
Employee Share Scheme
The Employee Share Scheme changes were approved by parliament last year and came into effect on 1 July 2015. It will improve the taxation situation for the granting of share options and shares to employees of startups and early stage entities. Due to the conditions of the scheme it would require a company to specifically structure its share scheme in order to qualify. It would be of no benefit for a once off provision of shares to a single employee.
The main change to the scheme is the taxing time of an option. Rather than being taxed when it is granted, a qualifying option will be taxed when it is exercised. This is to help alleviate the issue of upfront tax for options which may or may not eventually be worth anything.
The other main changes are that eligible employees can be granted a small discount of less than 15% in the share or option. A shares discount will be exempt from tax and the share will be subject to Capital Gains Tax(CGT) rules from acquisition with a CGT cost base equal to its market value at the time. For an option the discount will not be taxed upfront on the grant date, but will be taxed through CGT when the option is exercised. The CGT 50% will be also available at the time of sale.
- Turnover of less than $50milllion and less than 10 years.
- Australian tax resident and not listed.
For the entity to qualify, the scheme must be available to 75% of permanent employees who are Australian residents and have completed at least 3 years of service.
A qualifying employee must not have more than 10% of ownership interest or voting power in the entity. This is accounting for the shares an employee could obtain by exercising the rights over the shares.
Options, rights and shares are eligible.
The maximum deferral period will be 15 years.
In our next post, we’ll further explore existing grants and programs available for innovative Australian companies. If you have any queries about the new governments programs or existing government grants such as the R&D Tax Incentive, please get in touch.