Innovation Tax Incentives Commence 1 July 2016

Birchal.com

From 1 July 2016, a range of new tax incentives are available for investments in innovative, early-stage Australian companies. The incentives provide concessional tax treatment for investors in eligible companies including:

• a 20 per cent non-refundable tax offset on investment capped at $200,000 per investor, per year; and
• a 10 year capital gains tax exemption for investments held for 12 months or more.

The incentives take effect for investments made in eligible companies from 1 July 2016.

Which companies are eligible?

Generally, an Australian-incorporated company will be eligible if it is at an early stage of its development (the early stage limb) and it is developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return (the innovation limb).

The “early stage” limb

To satisfy the early stage limb, a company must pass the following four tests:

1. Recently incorporated or registered in the Australian Business Register
2. Total expenses of $1 million or less
3. Assessable income of $200,000 or less
4. Not listed on a stock exchange

The “innovation” limb

To satisfy the innovation limb, companies may choose to either:

• apply their circumstances against the objective tests (discussed below);
• self-assess their circumstances against the principles-based test (discussed below); or
• seek a ruling from the ATO about whether their circumstances satisfy the principles-based test.

Objective tests

A company may be eligible if it has at least 100 points for meeting certain objective innovation criteria. These include:

• Research and development claims above a certain threshold (50 or 75 points)
• Received an Accelerating Commercialisation Grant (75 points)
• Completed or undertaking an eligible accelerator programme (50 points)
• Third party has previously invested at least $50,000 (50 points)
• Holds certain intellectual property rights (25 or 50 points)
• Collaborative agreement with research organisation or university to commercialise an innovation (25 points)

Principles-based test

Implicit in the definition of innovation is the requirement that the company is developing a new or significantly improved type of innovation such as a product, process, service, marketing or organisational method. This list of various types of innovations provides flexibility for innovation companies and is adaptable to current and future innovations. The Oslo Manual, published by the Organisation for Economic Co-operation and Development (OECD) provides a description of these different types of innovations and a copy of this manual is available on the OECD website (www.oecd.org).

To qualify under the principles-based test for innovation, a company must be genuinely focused on developing its new or significantly improved innovation for the purpose of commercialisation and show that the business relating to the innovation:

• has the potential for high growth;
• has scalability;
• can address a broader than local market; and
• has competitive advantages.

A company could demonstrate how it satisfies the different elements of the principles-based test through the use of its existing documentation such as business plans, commercialisation strategies, competition analysis or other company documents. In addition, the company must show that tangible steps have been or will be undertaken in relation to that focus or capability.

Matt Vitale — matt@birchal.com.