Tax Reform

Innovation Statement: Important Tax Information you have to be Aware of

According to the Innovation Statement issued last week, the Government has made an effort to eliminate concerns over failure by offering tax benefits and amendments to insolvency rules to further increase the flexibility of business people and investors in innovative start ups.

Less Strict Same Business Test

The existing same business test will be loosened up so that business can get access to year-before losses when small modifications are made to their operations. The changes include replacing the same business test with more flexible predominantly similar business test.

Under this new same business test companies can engage in new business interests and transactions while still retaining access to carried forward tax losses. People who have used the existing test can confirm that it is tough to pass and is implemented very rigorously by the ATO. This reform will especially be applicable once the ownership of the business changes hands when the losses were made and should offer leeway for the company to look at new opportunities for its business.

The predominantly similar business test is designed to be implemented on losses incurred in the present and future income years; existing tests will remain in use for current losses.

Employer Share Schemes Undergo More Changes

This involves limiting the prerequisites for disclosure documents provided to workers under an Employer Share Scheme (ESS) intended for public access. The move will let non-disclosing employers to offer shares to their staff minus the necessity of divulging confidential information to business rivals.

The changes are also aimed at making ESS easier and simpler for innovative enterprises, so that they can lure in the right employees with no significant initial expenditure.

Several changes have been made to the ESS laws relating to shares and options distributed starting on 1 July 2015. The new reforms already comprise certain privileges for start-up businesses provided specific requirements are satisfied. It would be of interest to be watch what further concessions will be implemented to promote the use of ESS schemes for innovative businesses and strengthen tax results for the concerned parties.

The Government is expected to release the reforms in the first six months of 2016.

Tax Break for Early Stage Investors

Eligible companies will be entitled to a 20% non-refundable tax break based on the sum they have invested capped at $200,000 for each investor, annually. This tax break will help investors cut the total amount of their tax liability for the applicable year.

A 10 year CGT exemption for investments maintained for no less than 3 years will also be made available.

The new tax breaks are applicable to investors in eligible businesses:

  • that operate an eligible business (consultation with industry will determine this)
  • incorporated in the past 3 income years
  • are not participants in any stock exchange
  • incurring outlay below $1 million and income below $200,000 in the past year

The new tax concessions for investors are anticipated to start on 1 July 2016.

Early Stage Venture Capital Partnerships Get Tax Concession

The Government has launched a 10% non-refundable tax break for capital poured into a new Early Stage Venture Capital Limited Partnerships (ESVCLPs), and has upped the maximum limit on committed capital to $200 million from $100 million for new ESVCLPs. There are also plans to get rid of the rule requiring ESVCLPs to sell a business once its worth surpasses $250 million.

Furthermore, the eligibility and investment requirements have been relaxed to permit managers to implement a more types of investment activities and to allow for a more diverse range of investors.

Certain tax breaks are already available to investors in ESVCLPs. The reforms are intended to further increase the level of investment.

The reforms are anticipated to commence starting on 1 July 2016.

Depreciation Deductions Transition from Statutory Life to ‘Economic Life’

Regulations that restrict depreciation deductions for certain intangible assets such as patents to a statutory life has been abolished. These assets can now be depreciated over their economic life, if the business entity so chooses.

It looks like that the new rule would only cover intangible assets that had been purchased by the company, excluding assets that have been acquired within.

The advantage of being allowed to self-evaluate the effective life of intangible assets is you can claim tax deductions early, leading to reduced taxable income or increased tax losses for the company (if the effective life of the intangible asset is shorter than its statutory life).

Risky Projects Find Safe Harbours in Insolvency Reforms

The innovation statement will benefit insolvency and reconstruction players because the amendments offer a safe haven for directors against personal liability for insolvent trading if they hire a restructuring specialist to come up with a plan to put the business back to black.

Aside from helping directors engage in high risk ventures, the default bankruptcy period will be significantly cut to 1 year from 3 years.

A proposal paper on the insolvency reforms is expected to be issued in 2016.

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