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New tax incentives for start-ups and entrepreneurs: What does it all mean?

Back in December 2015, as part of its innovation statement, the Turnbull government promised new tax incentives for entrepreneurs and start-ups. In March this year, they followed through on that promise. Treasurer Scott Morrison announced the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 – which is much more exciting than it sounds.

‘The government has been listening carefully to stakeholders during the development of these measures,’ said Morrison in a press release about the incentives. ‘We have consulted widely with investors, industry bodies, universities and the start-up community to incentivise innovation and reward greater risk taking, while also maintaining the integrity and sustainability of the tax system.’

Let’s take a closer look at these brand-new tax incentives, who they involve, and what it all really means for Australia’s entrepreneurs and start-ups.

What are the new tax incentives?

The tax incentives are part of a new initiative, which is specifically designed to encourage investors to put funds into innovative, high-growth potential start-up companies. It is based on the Seed Enterprise Investment Scheme, a successful UK initiative that saw, in its first two years, more than $500 million invested in almost 2,900 start-up companies.

Here’s how the Australian scheme will work. Investors who support innovative start-ups will receive concessional tax treatments. These include a 20 per cent non-refundable tax offset on investments, which is capped at $200,000 per investor, per year. A 10-year capital gains tax exemption is also available, provided that investments have been held for 12 months or more.

There are also changes to Early Stage Venture Capital Limited Partnerships (ESVCLP), designed to attract more investment into venture capital (that is, money invested in a project that carries a substantial element of risk, such as a new business). Investors will now receive a 10 per cent non-refundable carry forward tax offset on capital that is invested through an ESVCLP. The maximum fund size for new and existing ESVCLPs has also been increased to $200 million.

So, what does this all really mean?

Basically, the government is making it easier and more inviting (tax-wise) for investors to back innovative start-ups and entrepreneurial ventures.

How do these incentives affect start-ups?

The new initiatives provide a substantial extra incentive for investors to provide much-needed funding for start-up companies. The government’s goal with this incentive is to foster new enterprises and promote entrepreneurship, which in turn boosts economic growth and job creation throughout the country. Start-ups will potentially have access to a whole new set of dedicated investors looking to take advantage of these lucrative incentives and support innovative Australian business at the same time.

When will these measures come into effect?

The new scheme is expected to begin as soon as amendments receive Royal Assent – so hopefully from 1st July, 2016. It passed both Houses of Parliament at the start of May, and once it has received Royal Assent the measures will apply for the 2016-2017 financial year.

Who’s eligible for the incentives?

Investments made in companies that meet the following criteria will be eligible for the incentives.

  • The company must undertake an eligible business.
  • The company must have been incorporated during the last three financial years.
  • The company must not be listed on any stock exchange.
  • In the previous financial year, the company must have had less than $1 million expenditure and less than $200,000 income.

What types of investment will receive the new tax benefits?

As we touched on briefly above, the types of investment eligible for these new tax incentives are:

As Scott Morrison himself says: ‘The National Innovation and Science Agenda fosters an environment that incentivises and rewards innovation, science and taking risks to succeed, and is critical to building a more innovative and agile economy.’

Whether you’re a start-up entrepreneur or an investor, the tax incentives introduced through the NISA are promising. Investors have concrete, very appealing reasons to direct their funds towards innovation, and start-ups will see the benefits of this through increased funding, support and opportunities.

You could say it’s a win-win situation!

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