Australia: 2016 – The year of the ideas boom?

Last Updated: 29 February 2016
Article by Patricia Monemvasitis and Kim Leontiev

Will 2016 be the start of an intellectual property lawyer's wildest fantasy? Will it be the year of ideas or even herald in a boom more perpetual than any mining, mineral or other commodity boom could ever be? Yes, we are talking an ideas boom! And so is the Federal Government in its National Innovation and Science Agenda many measures of which will be rolled out progressively from mid-2016. So, what's in store for this potential year of the ideas boom? In this post, we provide you with a summary of the highlights should you be planning more innovative or entrepreneurial resolutions for the New Year.

What's on the agenda?

The National Innovation and Science Agenda ('NISA' or 'the Agenda'), launched late last year (7 December 2015), comprises a range of Commonwealth government initiatives worth $1.1 billion over four years. The aim of the Agenda is to stimulate economic growth in key sectors of the Australian economy identified with research and development (including science, technology, and business innovations). In particular, NISA seeks to address 4 key issues or "pillars":

  1. insufficient access to early stage capital (for start-ups/entrepreneurs) ("Culture and capital")
  2. Australia's lowest level of industry research collaboration in the OECD ("Collaboration")
  3. Falling maths skills in Australia ("Talent and skills")
  4. Government following, not leading on innovation ("Government as exemplar")

What are the key measures?

There are a number of announced measures across each of the above 4 pillars which are summarised in turn.

  1. Tax incentives for early stage investment

According to the Federal Government, there has been a perceived bias and risk in early start-up investment which may be responsible for Australian business contributing 9% of market innovation in 2012-13 compared to the 19% of the top 5 performers in the OECD.

As such, new tax incentives to promote investment in innovative high-growth potential start-ups will commence in mid-2016.

Concessional tax treatment of a 20% non-refundable tax offset capped at $200, 000 per investor per year will be offered as well as a ten year exemption on Capital Gains Tax (CGT) where the investment is held for longer then three years but less than ten years.

These incentives will be available for investment in "eligible businesses." Although the precise definition to be adopted in legislation will be refined in consultation with industry groups, the essential requirements for eligible businesses will be an income of less than $200 000 and an expenditure of less than $200 000, incorporation during the last three income year prior to the investment, and not being listed on the stock exchange.

Based on the UK Seed Enterprise Investment Scheme, which resulted in over $500 million AUD investment in some 2,900 companies, these tax concessions could also prove good incentives for Australian early stage ("angel") investors who would be able to purchase short to medium term shares in start-up companies with an income tax off-set and without CGT liability.

  1. Venture Capital Limited Partnerships

Further tax incentives will be available to Early Stage Venture Capital Limited Partnerships (ESVCLPs) to induce investment in start-up businesses. Partners of a new ESVCLP will receive a 10% non-refundable tax offset on capital invested during the year. There will also be an increase from $100 to $200 million in the maximum ESVCLP fund size and the requirement to divest from a company upon its value exceeding $250 million will be removed. As ESVCLPs are critical investment vehicles within the early and growth stages of start-ups, the more tax-effective investment scheme could bring about more sources of funding and expansion of start-ups in Australia. These changes are expected commence on 1 July 2016.

  1. Crowd-Sourced Equity Funding

Another key financing stimulant is in the Crowd-Sourced Equity Funding (CSEF) initiative which amends the existing legislative framework on CSEF to allow start-ups to raise funds of up to $5 million per year online from the Australian public in return for equity. The initiative will be available for unlisted public companies with a turnover and gross assets of less than $5 million. Corporate regulatory requirements of holding AGMs, shareholder reports and financial audited statements will also be waived for a period of 5 years from incorporation to ease the burdens of incorporation on innovation businesses. These measures could ensure the financial viability of start-ups is secured during the critical early stages allowing growth, less regulatory and investor pressures and more operational freedom in a competitive international market.

  1. Insolvency reforms

When things do not work out, the difference between a crippling failure or a failure that can be used for a successful re-launch is critical. With this rationale, the insolvency reforms to be released in mid 2016 as a proposal paper. The reforms will seek to ease the impact of insolvency on start-up businesses. In particular, the default bankruptcy period will be reduced from three years to one year and safe harbour provisions will protect the directors from personal liability for insolvent trading where a restructuring advisor is appointed to develop a turnaround for the business. An insolvency will also no longer mean that key contracts with third parties are lost through exercise of what is known as "ipso facto clauses" in commercial contracts. These clauses allow a party to terminate a contract where the other party undergoes an insolvency event. The initiative seeks to make such clauses no longer operative at law where a company is undertaking a restructure. The finer points of how this will work will become evident in due course, however, the additional layers of protection could prevent liquidation and encourage re-launch upon restructure with many third-party contracts and relationship preserved.

  1. Changing the 'same business test'

Apart from the insolvency measures, the Income Tax Assessment Act 1997 (Cth) (ITAA) "same business test" will be modified to allow for more flexibility in claiming past year losses. This more flexible test will be known as the "predominantly similar business loss test" and will enable business owners to offset losses for businesses that, while not the same, use similar assets and generate income from similar sources. For example, if a company that makes a substantial loss undergoes a change in ownership by way of a salvaging investor which then alters the direction of the business but maintains the same manufacturing equipment, suppliers and target market, the losses of the previous income years of the past business would be accessible as tax offsets under the more relaxed "predominantly similar business test." By ensuring that past losses are not forsaken by the pursuit of a different business direction, the new test is intended to encourage businesses to take bolder, more innovative steps rather than continuing the same business and offsetting past year losses. The new test is set to commence from the second half of 2016.

  1. Public data sharing

Beyond the tax and financial measures, there is also a significant informational initiative with the launch of the open data webpage aimed to increase the flow of non-sensitive public data into the private sector. Non-sensitive public data will be made available without charge except in certain cases of specialised data services. This will allow the private sector to have a greater access to valuable information that can be utilised to improve service delivery and inform policy development. Public data may assist the private sector in analysing the market to determine key trends and service needs. Data sets will also be compiled according to perceived need in consultation with businesses, researchers, academics and the public which will assist with the availability of more useful and specialised data.

  1. Visas

A new entrepreneur visa will become available allowing entry into Australia for entrepreneurs with innovative ideas and financial backing from a third party. The visa seeks to allow entry into Australia of innovative foreign ideas with a requisite level of financial backing. Coupled with this, pathways for migration and permanent residency opportunities will be increased for post-graduate students in science, technology, engineering and mathematics (STEM) as well as Information and communications technology . These immigration reforms are designed to help encourage foreign talent in innovation and technological skills to live and work in Australia. These reforms are scheduled to be implemented in November and December of 2016.

Where to from here?

While we are yet to see the detail of most of these measures and their impact, there are important opportunities to look towards in 2016. It may be worthwhile then to consider how the NISA could deliver for you and what financial or organisational preparations you might make in anticipation of the proclaimed ideas boom. In particular, those seeking to enter the market or develop new intellectual property should be particularly vigilant to ensure that key tax incentives are not missed due to a premature launch or that the intellectual property assets are protected as soon as possible in light of what may be a very competitive ideas market in the years to come.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Patricia Monemvasitis
Kim Leontiev
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