Australia: Tax incentives in Australia for innovation

Last Updated: 10 April 2017
Article by Carlos Gouveia

IN BRIEF - CONCESSIONS AND TAX OFFSETS MAY BE AVAILABLE FOR ELIGIBLE BUSINESSES

As part of the increased focus in Australia on innovation through the Federal Government's National Innovation and Science Agenda, there have been a series of tax incentives which have been either introduced or modified in the last 24 months. The main incentives include concessions for venture capital entities, concessions for start-ups, and tax offsets for research and development, which are explained in this article.

CONCESSIONS FOR VENTURE CAPITAL ENTITIES

Limited partnerships

Certain limited partnerships are eligible for flow through taxation and the partners may be exempt from tax on capital and revenue gains made on the realisation of eligible venture capital investments.

The limited partnerships that qualify for the concessions are venture capital limited partnerships (VCLP), early stage venture capital limited partnerships (ESVCLP) and Australian venture capital fund of funds (AFOF). These entities are registered with Innovation and Science Australia under the Venture Capital Act 2002. The registration requirements are outlined below.

       
  VCLP ESVCLP AFOF
Place of formation of limited partnership Must be established in Australia or a foreign country in respect of which a double tax agreement is in force. Must be established in Australia or a foreign country in respect of which a double tax agreement is in force. Must be established in Australia.
Residence of general partners All of the general partners must be residents of Australia or a foreign country in respect of which a double tax agreement is in force. All of the general partners must be residents of Australia or a foreign country in respect of which a double tax agreement is in force. All of the general partners must be Australian residents.
Minimum period of existence At least 5 years and not more than 15 years. At least 5 years and not more than 15 years. At least 5 years and not more than 20 years.
The sum that the partner may be obliged to contribute to the limited partnership under the partnership agreement, called the committed capital At least $10 million. At least $10 million and not more than $200 million.
No partner's committed capital can exceed 30% of the partnership's committed capital, with some exceptions.
Not applicable.
Investment restrictions and requirements Generally, all investments must be eligible venture capital investments and all debt interests must be permitted loans.*
All activities must be related to making such investments.
Generally, all investments must be eligible venture capital investments and all debt interests must be permitted loans.
All activities must be related to making such investments.
All investments must be consistent with the partnership's approved investment plan which generally must focus on early stage venture capital.
Generally, all investments must be an investment in a VCLP or an ESVCLP and all debt interests must be permitted loans.
All activities must be related to making such investments.
       

*A permitted loan is broadly a loan to a company or unit trust that is repaid within six months (or such longer period allowed by Innovation and Science Australia). The company or unit trust must be an entity that can receive eligible venture capital investments and the limited partnership must hold at least a 10% equity interest in the entity.

There are a number of eligibility criteria for the tax exemptions for capital and revenue gains. Some of the criteria apply to the three forms of limited partnership while others apply to some of them only.

The common criteria include:

  • the realisation event must occur in relation to an eligible venture capital investment (see below) that has been held for at least 12 months
  • the limited partnership must have unconditional registration with Innovation and Science Australia at the time of the investment and realisation, and
  • all registration requirements for the limited partnerships must be met at the time of realisation

The particular criteria include:

  • for VCLP and AFOF, the partner claiming the exemption must be one of the following foreign resident entities:
    • a tax-exempt foreign resident
    • a foreign venture capital fund of funds whose committed capital in the partnership does not exceed 30% of the partnership's committed capital
  • widely held foreign venture capital fund of funds, and
  • a foreign resident whose committed capital in the partnership is not less than 10% of the partnership's committed capital
  • for ESVCLP, if the partner claiming the exemption is a general partner, it must be a resident of Australia or a foreign country in respect of which a double tax agreement is in force, and both foreign and resident limited partners can claim the exemption
  • the total value of the assets of the investment vehicle must not exceed $250 million for VCLP and AFOF and $50 million for ESVCLP
  • there are additional investment requirements for ESVCLP being:
    • the investment vehicle must not be listed when the limited partnership makes its first investment in the entity, and
    • any investments acquired from existing investors must add to an investment already held in the entity or new securities will be issued in connection with the investment and the total of the investments in the entity do not exceed 20% of the partnership's committed capital, and
  • for ESVCLP, there is only a partial exemption where the value of the assets of the investment vehicle exceeds $250 million at the end of any income year before the income year in which the gain arises if the gain arises later than six months after the end of the income year in which the value first exceeded $250 million

An eligible venture capital investment is an investment in shares, units, options or convertible notes in a company or unit trust that is at risk and does not represent more than 30% of the partnership's committed capital. The company or unit trust must:

  • be located in Australia and this is satisfied if the company or unit trust is an Australian resident and has more than 50% of employees and assets located in Australia for the first 12 months of the investment
  • not have a predominant activity (more than 75%) of property development or land ownership, finance, insurance, construction or acquisition of infrastructure or making passive investments, and
  • not be listed on a stock exchange at the time of the investment or must cease to be listed within 12 months

A partner in an ESVCLP is able to access two further concessions:

  1. exemption from tax on its share of income derived from an eligible venture capital investment (for example, dividends). If the partner claiming the exemption is a general partner in the partnership, it must be either an Australian resident or a resident of a foreign country in respect of which a double tax agreement is in force, and
  2. partners in ESVCLP who became unconditionally registered on or after 7 December 2015 may be eligible for a 10% non-refundable carry-forward tax offset for capital invested

Investments in VCLP, ESVCLP and AFOF are complying investments for the significant investor visa.

Tax-exempt foreign residents

A tax-exempt foreign resident who is registered with Innovation and Science Australia is also entitled to the exemptions from capital and revenue gains made on the realisation of eligible venture capital investments that have been held for at least 12 months.

Non-resident tax-exempt superannuation funds

A venture capital entity is exempt from tax on capital and revenue gains arising from the realisation of venture capital equity that it has held at risk for at least 12 months. A venture capital entity is a superannuation fund that is a resident of Canada, France, Germany, Japan, UK or the USA (and not a resident of Australia) that is exempt from tax in its country of residence. The venture capital entity must be registered with Innovation and Science Australia.

Venture capital equity is a share in an Australian resident company or a fixed interest in an Australian resident trust that is acquired by the venture capital entity by issue or allotment. Just before the acquisition of the venture capital equity, the sum of the assets of the investment vehicle and its connected companies and trusts and the amount of the investment by the venture capital entity must not exceed $50 million. The exemption is not available if the primary activity of the investment vehicle is property development or land ownership.

CONCESSIONS FOR START-UPS

Tax offset and modified capital gains tax treatment

Investors in an Australian Early Stage Innovation Company (ESIC), which is broadly a company that is at an early stage of establishment whose activities are focused on the development of new or significantly improved innovations for commercialisation, are provided with a non-refundable carry-forward tax offset equal to 20% of the amount paid for the investment, subject to a cap, and a capital gains tax exemption for shares that have been held for between one and ten years.

Further information on these concessions is contained in our article New tax incentives for start-up investors.

Employee share schemes

From an employee's perspective, the usual tax treatment for employee share schemes is that any discount on acquisition of shares or rights is subject to income tax and any subsequent increase in value is subject to capital gains tax.

If the employee share scheme relates to shares or rights in a start-up company:

  • the discount will not be taxed at all, and
  • for capital gains tax purposes:
  • shares are deemed to have been acquired for market value and the cost base of rights is equal to the cost of acquisition and sale, and
  • shares acquired from the exercise of rights are deemed to be acquired when the rights are acquired - this means that the employee will be eligible for the 50% discount 12 months after the rights are acquired

The conditions which must be satisfied include:

  • the securities of the company and its related companies are not listed on an approved stock exchange at the end of the income year before the shares or rights were acquired
  • the company and its related companies have been in existence for less than 10 years at the end of the income year before the shares or rights were acquired
  • the company has an aggregated turnover of not more than $50 million for the income year before the shares or rights were acquired
  • for shares, the discount is not more than 15% of its market value, and for rights, the exercise price is greater than or equal to the market value of an ordinary share in the company at the time that the rights are acquired
  • the employer is an Australian resident company
  • all of the interests available for acquisition under the employee share scheme relate to ordinary shares
  • the employee share scheme prohibits the disposal of shares or rights (or shares acquired as a result of exercising the rights) for at least three years or when employment ends
  • immediately after acquiring the shares or rights, the employee does not hold a beneficial interest in more than 10% of the shares in the company and is not in a position to cast more than 10% of the maximum number of votes that might be cast at a general meeting of the company, and
  • for shares only, at the time that the employee acquires the shares, at least 75% of the permanent employees who have completed at least three years of service and who are Australian residents are or have been, entitled to acquire shares or rights under an employee share scheme operated by the employer

TAX OFFSETS FOR RESEARCH AND DEVELOPMENT (R&D)

There are two types of tax offset available for R&D entities that carry on eligible R&D activities:

  • a 43.5% refundable tax offset for R&D entities with an aggregated turnover of less than $20 million for the income year, other than R&D entities that are controlled by one or more tax exempt entities, and
  • a 38.5% non-refundable carry-forward tax offset for all other R&D entities

The tax offsets are available for expenditure on R&D activities, the decline in value of assets used for conducting R&D activities, feedstock expenditure and certain other items. The tax offsets are not available for interest, expenditure that is not at risk, core technology expenditure, expenditure included in the cost of a depreciating asset (decline in value may be eligible) and expenditure incurred to acquire or construct a building.

Generally, the tax offsets are available for expenditure for an income year between $20,000 and $100 million. Expenditure in excess of $100 million qualifies for a reduced tax offset rate of 30% which is equal to the standard corporate tax rate.

R&D entity definition and eligible R&D activities

An R&D entity is a company incorporated in Australia, a company incorporated outside Australia that is an Australian tax resident, a company incorporated outside Australia that is a resident of a country with a double tax agreement with Australia and carries on R&D activities through a permanent establishment in Australia.

Eligible R&D activities are classified as either core or supporting. Core R&D activities are experimental activities whose outcome is not known or cannot be determined in advance, but can only be determined by applying a systematic progression of work that is based on established scientific principles and proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions. The activity must be conducted for the purpose of generating new knowledge (including in the form of new or improved materials, products, devices, processes or services). There are a number of exclusions from core R&D activities, including market research, sales promotion and management studies.

Supporting R&D activities are those that are directly related to core R&D activities or, for certain activities, have been undertaken for the dominant purpose of supporting core R&D activities.

Generally, only activities conducted in Australia will qualify as eligible R&D activities. However, R&D activities conducted overseas also qualify in limited circumstances where the activities cannot be undertaken in Australia.

The eligible R&D activities must be registered with AusIndustry within 10 months of the end of the income year.

Carlos Gouveia
Corporate advisory
Colin Biggers & Paisley

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Carlos Gouveia
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions