On 1 July 2016 the Government’s new tax incentive to support innovation investment will come into effect. The Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 was passed earlier this year and is a cornerstone of the National Innovation and Science Agenda (NISA), released by Prime Minister Turnbull late last year.
The NISA was launched and promoted as a $1billion package to boost innovation in Australia, and included a broad range of small programs and ideas that are being released over time. However, there has been substantial confusion within the innovation ecosystem on what activities are eligible under the different programs, when the programs are going to be released, and how to get access to the benefits. In addition, a significant concern is that the administration of many small programs will significantly dilute the overall value and benefit to the community. What has also come to light is a concern on the transparency of how some of the grant “winners” under NISA initiatives are being selected.
That being said, the Tax Incentives for Innovation is a positive step forward to encourage new investments into Australian innovation. The benefit includes tax offsets and Capital Gains Tax (CGT) benefits for qualifying investors into eligible Australian Early Stage Innovation Companies (ESIC).
The incentives are:
- 20% non-refundable tax offset:
- capped at a maximum tax offset of $200,000 per year for sophisticated investors; or
- maximum investment per year of $50,000 for retail investors, with a maximum tax benefit of $10,000; and
- CGT exemption for shares that are held between 1 and 10 years.
The incentives are available for issues of new shares by qualifying ESICs. Both of the following tests must be satisfied in order to achieve ESIC qualification:
- Early Stage test; and
- Innovation Test.
The Early Stage test requires the company to:
- Be incorporated in Australia within the last 3 income years or incorporated in Australia within the last 6 income years and across the last 3 of those income years it and its *100% subsidiaries incurred total expenses of $1 million or less; and
- Have total expenses of $1 million or less in the previous income year; and
- Have assessable income of $200,000 or less in the previous income year; and
- not be listed on a stock exchange.
The Innovation Test requires the company to satisfy one of the following additional tests:
- 100 Point innovation test; or
- Principles based innovation test.
The Innovation tests must be reviewed in detail, with the underlying intention being that the ESIC has high growth potential based on innovation.
We believe that the Tax Incentives for Innovation will provide a boost to innovation investment in Australia, however we urge caution and careful due diligence to ensure that the investment will be in a qualifying ESIC and obviously assess the value of the tax benefit for the investor. As the ESIC tests involve assessment of innovation criteria we believe that it may be beneficial for the due diligence to include experts experienced in both innovation and tax programs. As such, R&D Tax Incentive advisors maybe well placed to assist in the due diligence process.