Budget News For Early-stage Businesses And Their Investors

Steve Carey

The 2016 Federal Budget is of interest to early stage innovative companies and those considering investing in them.

budget news for innovative startups

You may recall that last year a series of measures were announced, due to start on 1 July of this year, offering tax incentives for early stage investors to provide concessional tax treatment for investments made in qualifying early stage innovation companies (ESICs), such as startups, with high growth potential.

The 2015 Budget Support For Innovation And Startups

The intention was to promote a culture of innovation and entrepreneurial endeavour by encouraging investment in companies at the pre-commercialisation stage. These new tax incentives offered eligible investors• A 20% non-refundable tax offset on amounts invested in qualifying ESICs, with the offset capped at $200,000 per investor per year; and• A 10 year capital gains tax exemption for investments held as shares in an ESIC for at least 12 months, provided the shares held don’t constitute more than a 30% interest in the ESIC.

2016: Increasing Attractiveness for Investors

Now, in this Budget, the government has announced amendments that• REDUCE the holding period from three years to 12 months for investors to access the CGT Exemption;• INTRODUCE a time limit on incorporation and criteria for determining if a company is an innovation company under the definition of “eligible business”;• REQUIRE that the investor and innovation company be non-affiliates, and• LIMIT the investment amount for non-sophisticated investors to qualify for the tax offset to $50,000 or less per income year. (Source: Budget Paper No 2, p 21)The concessions apply to investments in companies incorporated during the last three income years and that are undertaking an “eligible business”, the scope of which was to be determined by the government in consultation with industry. In addition, the company cannot be listed on any stock exchange and must have expenditure of less than $1m and income of less than $200,000 in the previous income year. While these changes are not dramatic, they do increase the attractiveness for investors of innovative companies that face difficulty attracting the capital and business expertise needed to succeed. However, as always the devil is in the detail: these are currently announcements only, and it all depends upon them becoming law (and, as we saw particularly with Tony Abbott and Joe Hockey’s ill-conceived 2014 Budget, you wouldn’t want to count your chickens before they hatch). Besides, there’s the little matter of an election in the offing…

And The Labor Party's Intentions...

And speaking of which, the Labor Party has announced its intention to create a new $500 million Smart Investment Fund to partner with venture capitalists and licensed fund managers to co-invest in early stage and high potential companies, providing a Commonwealth investment of up to 50% of the start-up capital. It will open two rounds over five years. The Smart Investment Fund is based on the successful Innovation and Industry Funds, created by the Howard Government in 1998 and cut by the Abbott Government in last year’s Budget.

Steve Carey

The author wishes to thank Tim Kilham of Lanyon Partners (timK@lanyonpartners.com.au) for his help with this blog post.

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