Australian government seeks definition of an innovative company

As the Australian government embraces innovation, agility, and tax incentives for startups, the government is after an actual definition of what an innovative company is.

Amidst all the banging on from the Australian government on the topics of innovation, agility, and exciting times, one question has yet to be answered: What exactly is an innovative company that is set to receive the benefits of the proposed changes to the tax system?

To that end, the government on Monday unveiled a consultation paper on tax incentives for early stage investors, and is asking Australians to help answer the question.

"A cornerstone of this consultation is the definition of an innovation company," the paper said. "The government is keen to hear from stakeholders on the appropriate definition of an innovation company, and how the eligibility principles and criteria can leverage off existing industry concepts and business practices."

As part of its Innovation Statement made in December last year, the government said it would introduce a 20 percent non-refundable investment tax offset capped at AU$200,000 per investor per year; a 10-year capital gains tax exemption; and a reduction in bankruptcy default from three years to one for so-called innovative companies.

So far, the criteria for an innovation company has been narrowed down to an unlisted company that was incorporated in Australia during the last three income years; had an assessable income of AU$200,000 or less in the prior income year; and had expenditure of AU$1 million or less in the prior income year.

Beyond that, the government said it wants to write into any resultant legislation a set of principles that define innovation.

"Principles are less prescriptive than a set of rules about what can and cannot be characterised as innovative," the paper said. "Prescriptive rules and tests can only accommodate the types of activities and ideas that are foreseen; however, innovation is also about the creation, disruption, or improvement that has not been foreseen or achieved by others.

"A principles-based definition is intended to be intuitive and draw upon established industry terminology, which will allow the law to accommodate new innovative entities not yet envisioned at this point in time. In addition, companies should be able to utilise existing documentation, such as a business plan, to determine whether they would qualify."

Based on a OECD definition of innovation, the government said that any company looking to receive tax incentives would need to be able to commercialised, and have a focus beyond the local market.

"The definition would also require the innovation company to exhibit high growth potential through a management team being able to successfully scale the business as it grows and maintain competitive advantages over incumbents or new competitors."

As an alternative to the principles-based approach, companies will be able to access the tax incentives if they meet a number of gateway criteria, which could include one or more of the proportion of expenditure spent on research and development; being involved in an approved accelerator program; gaining support from appropriate government programs; or having developed, acquired, or licensed a patent in multiple jurisdictions over the past three years.

The final alternative could be a determination from the Australian Taxation Office instigated by the company or a possible investor prior to an investment.

It was also proposed in the paper to limit direct investment in innovation companies to so-called sophisticated investors, as set out in the Corporations Act.

"There is an argument that the class of eligible investors should be limited to sophisticated investors as a proxy to unlocking commercial expertise, and as a way to reduce administrative costs by limiting the disclosure requirements during fund raising."

Submissions to the consultation are open until February 24, 2016.

Since the ascent of Malcolm Turnbull to the prime ministership in September last year, Australia has, under the auspices of an "ideas boom", set aside over AU$110 million for helping young Australians gain STEM and digital technology skills.

Last week, though, it was revealed that the CSIRO would cut around 350 jobs, mainly from climate research. Later in the week, the CSIRO touted its involvement in the detection of gravitational waves; however, The Sydney Morning Herald reported today that the work had been done by a unit that is now closed.