Igniting startups with a new tax incentive

Igniting startups with a new tax incentive

The Government’s innovation initiative to support early startups announced last year is now a step closer to becoming a reality.


Director, Tax

KPMG Australia


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Startup Boy Lightbulb idea

I was reading the Australian Financial Review the other day and the spotlight has shifted from venture capital investments into companies that were well and truly along the path to growth, to identifying companies to invest in at their infancy and betting on their growth prospects. The Government’s innovation initiative to support early startups announced last year is now a step closer to becoming a reality.

If you’ve got an innovative idea, new legislation just introduced into Parliament will allow you to set up an innovation company to enable your investors to obtain a 20 percent tax incentive offset (capped at $200,000) and a 10-year capital gains tax (CGT) exemption.

The critical aspect of this legislation is whether you fit within the conditions of being an ‘innovation company’ and whether your investors qualify for the tax incentives. The new rules will apply to investors in companies with shares issued on or after 1 July 2016 or Royal Assent of legislation. We hope the Bill will receive Royal Assent by 30 June 2016 but with the Federal Budget and a possible looming Federal Election, you just never know.

The new proposals benefit the investor by providing them with a tax incentive for investing in early stage ‘innovation companies’. As an investor, you do need to work out whether you are a ‘sophisticated investor’ or not as defined under the Corporations Law (and very generally, the distinction lies in whether disclosure requirements are required). If you are ‘sophisticated’ then there is no limit on your investments into an innovation company to access the tax incentive. For other investors, you can only get the tax incentive if you invested $50,000 or less in the shares of the innovation company.

The critical aspect of companies being eligible for the tax incentive is that they must either meet a 100 points test which is based on certain research & development criteria (e.g. if you received an Accelerating Commercial grant, you should gain access to the tax incentive); or a principles-based test. These two tests allows startups flexible pathways to attract angel investment.

Innovation initiatives are high on the Government’s agenda and this latest legislative development sends a clear message of support for startup companies to foster commercially focused innovative ideas.

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