Incentives to promote early start up investment

The Government has announced new initiatives aimed at promoting investment into start up entities in Australia.

2015-12-14

The Government recognises that entrepreneurs and innovators tend to head overseas (mainly to the UK and US) in order to access funding for their start up projects. These new initiatives are aimed at retaining such innovation in Australia and promoting a culture of entrepreneurship and innovation.

Tax concessions for start ups

Investors into innovative start ups will receive a 20% non-refundable tax offset based on the amount of their investment, capped at $200,000 per investor per year. Investors will also be exempt from capital gains tax on disposal of their investments held for three years. This initiative mirrors the Seed Enterprise Investment Scheme in the UK which resulted in over $500 million in funding to over 2900 start up companies.

Further tax changes proposed to benefit start up companies include:

  • Relaxing the same business test by introducing a “predominantly similar business test” which should allow start ups to access prior year losses where their business, while not the same, uses similar assets and generates income from similar sources
  • An option to self assess the tax effective life of acquired intangible assets (currently such assets are required to be depreciated over the statutory effective life). This may allow start ups to claim depreciation for intangible assets over a shorter time period
  • Limit the requirement for disclosure documents given to employees under an employee share scheme to be made available to the public. Employee share schemes are important for start ups that may not be able to pay high salaries during early years. However, they are currently reluctant to undertake ESSs because of the requirement to make commercially sensitive information public. These changes are aimed at removing this impediment.

Further concessions to boost Early Stage Venture Capital Limited Partnerships (ESVCLPs)

There are currently approximately 25 registered and unregistered ESVCLPs in Australia.  The current tax concessions available to ESVCLPs have been around for a while but have not successfully attracted significant investment nor an influx of new funds. Additional tax incentives are being provided to investors in ESVCLPs which include:

  • Flow through tax treatment for the partnership whereby partners are taxed on their share of the partnership income
  • Revenue or capital gains partners receive from the disposal of eligible investments made through an ESVCLP are exempt from income tax.

There has been a flurry of fund managers setting up such funds in mid 2015 when the Government amended the Significant Investor Visa program to require applicants to invest at least $500,000 (of the $5 million) in eligible Australian venture capital or growth private equity funds investing in start up and small private companies in order to be eligible for the visa. The Government is hopeful that the following changes will attract further investment:

  • Partners in a new ESVCLP will receive a 10% non-refundable tax offset on capital invested during the year
  • The maximum fund size for new ESVCLPs will increase from $100 million to $200 million
  • ESVCLPs will no longer need to divest a company when its value exceeds $250 million.

The proposed start date for the majority of these initiatives is 1 July 2016. We will need to wait and see whether these initiatives will achieve the intended outcome of boosting funding into start ups and encouraging a culture of entrepreneurship and innovation in Australia.

To find out more, please contact Stephen O'Flynn or Abirami Chellapen.