A strong first step in lifting Australia’s capacity to innovate

Wednesday 09 December 2015

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The Federal Government’s National Innovation and Science Agenda recognises that the barriers to innovation must be lifted, according to EY.

EY Research and Development (R&D) Partner Mark Chan welcomed the innovation initiatives but cautioned that careful consultation was needed on the details and funding sources to ensure that the measures are impactful and ultimately effective economy wide.

“We see the Innovation Agenda as a powerful statement of intent and a strong first step to lift the nation’s capacity to innovate.

“Careful consultation on the detail is needed to ensure that the ‘lifting’ capacity occurs in an effective way for start-ups as well as mid to large companies and the public research sector.

“If funding the Innovation Agenda is done by pairing back existing tax and R&D incentives - which is currently under review by the Government - this would dilute the impact of the announced changes,” Mr Chan said.

EY Tax Partner Justin Howse said of the four other Innovation Agenda measures that impact tax, it is critical that Government consult with business in coming weeks to ensure they understand what is required of them.

“As with all innovation, the concepts need now to be finalised in law with concrete programs in the New Year to give businesses and fund managers the certainty they need to take action.”

Venture capital investment concessions, expected to commence from 1 July 2016, include:

  • Twenty per cent non-refundable tax offset on investments, capped at $200,000 per investor per year and capital gains tax exemption up to 10 years (provided investments are held for at least three years).
  • These are directed at investments in companies with conditions including that they undertake an eligible business (scope to be determined in consultation with industry) and have expenditure of less than $1 million and income less than $200,000 in the previous income year respectively.

EY Transaction Tax Partner Ian Scott said it was expected that these incentives will attract interest from Australian investors, including angel investors who might be motivated to lend their expertise to startup businesses.

“It is a positive step that these concessions will be available for investors through early stage venture capital funds, albeit at a lower rate.”

The new Venture Capital Limited Partnerships (VCLPs) and Early Stage VCLPs (ESVCLPs) new arrangements, expected to commence from 1 July 2016, include: 

  • Ten per cent non-refundable tax offset for partners on capital invested in a new ESVCLP.
  • Maximum fund size for new ESVCLPs will be increased from $100 million to $200 million.
  • ESVCLPs will no longer be required to divest a company when its value exceeds $250 million.
  • Eligibility and investment requirements for ESVCLPs and VCLPs will be relaxed to a broader range of investment activities and a greater diversity of investors.
  • Employee share schemes (ESS) reforms to limit the disclosure documents given to employees under an ESS to be made available to the public.

Mr Scott said one of the key measures which the venture capital industry and local investors have been asking for, an elective CGT regime for VCLPs and ESVCLPs, has unfortunately not been included in the reform package.

“Without the certainty around whether the capital gains tax concessions are available on any gains made by investors, it will be difficult to attract local investors into VCLPs.”

Mr Howse said the tweak to the ‘same business test’ to relax the company loss if businesses enter into new transactions or business activities was a positive step.

“The new and more flexible ‘predominantly similar business test’ will apply to losses made in the current and future income years - that test will be useful but not unlimited.

“The dynamism of modern business always presented a corridor of uncertainty when applied to the same business test.  We foresee many of the same issues arising with the predominantly similar business test. That’s why we need to firm up the announcements through consultation,” he said.

Mr Howse also welcomed the intangible asset depreciation option to self-assess the tax effective life of acquired intangible assets that are currently fixed by statute, for assets acquired from 1 July 2016.  

“This measure does not transform the tax treatment of intangibles onto the same level as visible, tangible assets, but it will remove a feature of the tax law that has seemed anachronistic.”

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