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KickStartup Series: What Are the Upcoming Tax Incentives for Early Stage Investors?

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On 7 December 2015, the Federal Government announced a National Innovation and Science Statement that included some important tax proposals aimed at encouraging innovation in Australia. In addition to increasing access to company losses and reforming employee share scheme requirements, there are also new tax incentives to encourage greater investment in early stage startups.

The upcoming changes will be based on the successful UK Seed Enterprise Investment Scheme. This scheme resulted in over $500 million in startup investment for almost 2,900 companies in its first two years. Prime Minister Malcolm Turnbull has said over 4,500 startups miss out on equity finance and additional funding every year. The new tax incentives for early stage investors will certainly be a major cornerstone of the Federal Government’s Innovation Statement in shaking up startups and innovation.

Startups must meet eligibility requirements, including:

  • Undertake an ‘eligible business’ (As defined by the Department of Industry, Innovation and Science in 2016); and
  • In the last three income years, have been incorporated; and
  • Not be listed; and
  • Have an expenditure of less than $1 million and income of less than $200,000 in the previous income year.

The investment can be direct or indirect (via an investment fund). For any investors that claim non-refundable offsets, the tax offset will be available once the funds are committed and subscribed by the startup.

Eligible investors in early stage growth startups will be entitled to:

  • A 20% non-refundable tax offset about the investment, up to $200,000 per year per investor; and
  • A ten-year exemption from capital gains tax (CGT) for investments held for a minimum of three years. After ten years, any subsequent gain will be subject to CGT. However, a market value cost base will be inherited at that time.

Changes to Early Stage Venture Capital Limited Partnerships

There will also be some new incentives for Early Stage Venture Capital Limited Partnerships (ESVCLPs). Currently, there are approximately 25 ESVCLPs in Australia. These proposed changes will help attract more investment for Australia’s potential startups. There will also be changes in relaxing the eligibility and investment requirements for ESVCLPs and venture capital limited partnerships. Such changes include:

  • A 10% non-refundable tax offset for capital invested by partners in new ESVCLPs;
  • Increasing the permitted cap fund size on committed capital from $100 million to $200 million for new ESVCLPs; and
  • Removing the requirement that ESVCLPs divest of an investment once their investment value exceeds $250 million.

Plan Ahead

These upcoming tax incentives are expected to take effect 1 July 2016. Most importantly, the incentives only apply if the startup was created less than three years before the investment. For startups that have not incorporated and are reaching the three-year mark, a strategic decision to hold off on capital raising will incentivise investors with tax breaks. Avoid putting early stage investors in the position of choosing to invest without tax breaks. We will continue to cover the full impact of the innovation statement amendments as they are announced over the next coming months.

If you have any questions about the implications of the new regime, contact LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.

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