Starting Up Your Startup: Startup Tax Incentives

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Table of Contents

• What is Involved in the New Benefits?
• Who is Considered an Investor?
• What Investments Qualify Under the Schemes?
• What Startups Allow Investor Tax Incentives?

As government-funded billboards remind you, we are in the innovation age, and it is a great time to think about starting up your startup. In December last year, the Government announced their startup tax incentives as part of the billion dollar innovation statement aimed at driving investment and economic growth to encourage innovation and Australia’s entrepreneurial culture. If passed, the Tax Laws Amendment Bill 2016 will apply from 1 July 2016. We unpack the Bill and its effects below.

What is Involved in the New Benefits?

The overarching aim of the Government’s new tax benefits is to promote entrepreneurship by helping early stage investors. The Government intends to address a funding gap between pre-concept stage financing and support financing through two new programs – Early Stage Venture Capital Limited Partnerships (ESVCLP) and the Venture Capital Limited Partnerships (VCLP). 

Who is Considered an Investor?

The ESVCLP and VCLP schemes are available to all investors except widely held companies and their affiliated subsidiaries.

The key benefits to investors include a tax offset of 20% of the value of investment subject to a maximum cap of $200,000. Investors that secure newly issued shares in innovative Australian companies can enjoy the tax offset. Furthermore, Investors may disregard capital gains acquired from investing in shares that have been held between one and ten years in an Australian Early Stage Innovation Company.

What Investments Qualify Under the Schemes?

Eligible investments under the scheme are shares or equity that a qualified, innovative company issues. The intention is to target new investors to drive startup growth and promote innovation. Convertible notes can be included under the schemes. Unfortunately, employees who are involved in an Employee Share Scheme will not benefit. However, there are relevant tax incentives available to Employees in such schemes.

What Startups Allow Investor Tax Incentives?

Broadly speaking, a company incorporated in Australia will qualify for the proposed tax incentive scheme. There are two stages of Startups allowing for the new investor tax benefits – early stage and innovation stage.

An early stage startup must satisfy the following criteria: 

• Have been incorporated in Australia in the last three income years;
• Not be listed on a stock exchange;
• The company and any wholly-owned subsidiaries must not have an assessable income of more than $200,000 in the previous income year; and
• The company and any wholly-owned subsidaries must not have incurred expenses more than $1,000,000 in the previous income year.

Innovation Stage

In order for a company to satisfy the innovation limb and qualify, the company’s activities must be characterised by development with a focus on commercialization. The below criteria must be met:

• the company must qualify for a circumstance and objective based test in the application process where 100 points must be achieved; and
• receive a ruling in favour of their circumstances by the commissioner.

The company must also have a focus on development with the genuine purpose of commercialisation and high growth. Qualifying startups will need to report to the Commissioner at the end of the financial year with investor information.

If passed, this Bill will significantly impact the startup sphere in Australia. If you need advise on growing and scaling your startup, including capital raising and trademark registration, get in touch with our startup lawyers or contact LegalVision’s taxation lawyers on 1300 544 755 or by filling out the form on this page.