​Senate passes tax incentives to encourage startup investment

Two new tax incentives aimed at making investments in Australian startups more attractive will take effect on July 1 after passing the Senate on Wednesday.
Written by Asha Barbaschow, Contributor

Two new tax initiatives designed to encourage early-stage investment in Australian startups have passed the Senate on Wednesday.

Coming into effect on July 1, 2016, both the Tax Incentive for Early Stage Investors and New Arrangements for Venture Capital Limited Partnerships are expected to promote investment in startup companies that display high growth potential as well as improve a business' access to venture capital.

The tax incentives for early-stage startup investment include a 20 percent non-refundable tax offset for qualifying investments, which is capped annually at AU$200,000 per investor per year.

Additionally, there is a 10-year exemption from capital gains tax for qualifying investments held for at least one year.

However, investors who do not meet the requirements of the sophisticated investor test under the Corporations Act 2001 will be limited to investing amounts of AU$50,000 and below in an income year.

To be classed as a qualifying investment, startups must: Meet one of the government's two innovation criterion; be less than three years old; not be listed on any stock exchange; and not have an expenditure of AU$1 million or less and an assessable income of AU$200,000 or less in the previous income year.

Alex McCauley, CEO of StartupAUS, has called the new tax incentives a game-changer for the country's startups and a huge win for anyone interested in investing in startups.

"In the UK, where they have a similar scheme, research by Deloitte suggests the number of angel investors increased by 58 percent within a very short time after the scheme was introduced. If we see those kinds of numbers, Australian entrepreneurs will enjoy substantial improvements to their ability to access early-stage capital and investor talent," McCauley said.

The initiative was announced in December and forms part of the federal government's AU$1.1 billion National Innovation and Science Agenda.

Minister for Industry, Innovation and Science Christopher Pyne said the new initiatives will make investing in venture capital more user-friendly and internationally competitive.

"Over 4,500 startups are missing out on equity finance each year. These measures will help startups get access to crucial funding to grow their startup," he said.

"Investors, venture capital funds, and innovative companies in all industries will benefit from these measures."

Last month, the federal government released draft legislation centred on providing companies with access to past year tax losses to reduce taxable income, in a bid to incentivise and reward innovation.

The draft contained proposed amendments to existing income tax assessments, including the substituting of the "same business test" with a more flexible similar business test to improve access to losses for companies that have changed ownership.

"The inability to utilise losses where a company has entered into new types of transactions or business activities inhibits a company's ability to grow," the government said in a statement.

"This discourages companies which have made losses from seeking new investors or exploring new profit-making activities because they may lose access to these valuable past year losses."

The federal government also released a new set of draft regulations on Australia's proposed crowdsourced equity funding (CSEF) framework in December which details how non-listed public companies, including startups, can access CSEF from external investors.

In March, Pyne said the new CSEF laws have already made their way through the House of Representatives and are waiting in the Senate for their passage.

"We aren't just talking about jobs and employment, we're actually getting on with the job of creating employment and growth in our economy and that's the difference between us and our Labor opponents who do much talking about things as though they are new things -- we're a long way down the track," he said at the time.

"This team is helping the economy transition to a new place and certainly this is the team that can be trusted to do so."

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