Tax incentives for investors?

By June 9, 2016 Start ups, Tax

WHAT ARE THE TAX INCENTIVES FOR INVESTORS?

Late in 2015 the Government announced they’d be giving tax breaks to investors in early-stage innovation companies (commonly, and confusingly, referred to as “start ups”). These tax breaks are looking likely to get royal assent and, as such, should be in effect from 1 July 2016.

TAX BREAKS

What exactly are the tax breaks?

  1. 20% non-refundable tax offset for investment capped at $200,000 per investor per year*. A tax offset works like a credit against a tax bill you might have in a year – this makes it better than a tax deduction as for every $1 invested you get $1 off your tax bill (in theory!). Note that unlike the R&D offset this one is not refundable so if you don’t have a tax bill large enough to soak up the entire offset you’ll lose some of the benefit.
  2. 10 year capital gains tax exemption on investments held for at least 1 year. This means you can invest in an eligible company, hold the shares for at least 1 year (but not more than 10) and sell them tax-free!

*Note that a limit of $50,000 per annum applies for investors not considered ‘sophisticated’. This restriction is designed to recognise that investment in early-stage companies is inherently risky, more so than investing in blue chip stocks and, as such, needs to be restricted to a certain degree.

What sort of investments are eligible? The tax breaks are restricted to investments in companies that:

  • undertake eligible business activity (see below)
  • were incorporated within the last 3 years
  • are not listed on any stock exchange
  • the investor doesn’t hold more than 30% of total equity
  • have income of less than $200,000 in the previous financial year, and
  • have expenditure of less than $1 million in the previous financial year

What is ‘eligible business activity’? The legislation is looking at companies which are “developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return.”  This can be defined as a company which:

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

There is more to this definition, and the legislation in general, so for those really keen readers, you can go here for the Explanatory Memorandum that accompanied the legislation.

The above is a very broad summary of the relevant legislation and designed to get you thinking. If you’re interested in learning more about these tax breaks and how they might help you entice investors into your company, or alternatively you may want to invest yourself, please get in touch, we’d love to help.