Innovation companies could miss out on a vital source of financing if eligibility for tax incentives is too narrowly drawn, warns KPMG.
In its response to the Treasury’s Consultation Paper of Tax Incentives for Early Stage Investors, KPMG expresses concern that investment into innovation start-ups might be limited if eligibility criteria for the incentives are too narrowly defined.
Angus Wilson, KPMG Head of Deals Advisory – Tax said: “Whilst KPMG is supportive of the proposed incentives, we feel that the definition of an ‘innovation company’ – which involves a list of considerations in determining whether the company carries on a business that is “eligible” – is problematic. The government must be careful that the complexity and uncertainty which has characterised the early stage venture capital limited partnership (ESVCLP) rules is not replicated in this new tax incentive.”
KPMG’s submission also mentions concerns raised by a number of clients in respect of the proposed limitation of concessions to so-called ‘sophisticated investors’ as defined in the Corporations Act 2001. This limitation, which is defined as those earning more than $250,000 per annum or having a net worth of more than $2.5 million, could potentially exclude an important group of smaller seed capital providers to innovation companies.
Angus Wilson said: “There is concern in the market that this proposal could become a roadblock to accessing capital for aspiring entrepreneurs. Some have questioned whether the Tax Act is the right platform to limit the type and nature of investors in innovation companies. One suggestion worth considering is that the tax incentive be tied with another important innovation agenda reform, equity crowd funding*. The new regulatory framework and safeguards developed around that to protect investors from financial and other risks, including fraud, could be extended and applied to the new tax incentive. But we acknowledge that this is a difficult issue, which requires further consideration.”
KPMG believes that the policy is being unnecessarily restricted to very early stage start-ups. And it argues that unit trusts should be eligible for the tax incentive.
Angus Wilson said: “The thresholds for income and expenditure amounts appear low and we worry that it could defeat the objective of encouraging equity investment into young, growing businesses. It could be argued that funding mechanisms like the R&D incentive and the ESVCLP regime are available later on, but we would still encourage the government to take this opportunity to boost innovative enterprises.
“It seems the government prefers the concept of corporate vehicles for investment funds. But this will require a significant enactment of new legislation for innovation company taxation (such as definition of dividends and returns of capital). Unit trusts can achieve the same taxation outcomes as desired by the stated policy objectives, and are understood largely by Australian investors and can be used without the need for to enact a specific set of new corporate taxation rules”.
He concluded: “Creating an economic and regulatory environment which supports innovative start-ups and ensures that Australian start-ups have access to the equity funding they need through appropriate incentives for investors is critically important. We need to learn from what has and has not worked from previous regimes. Our experience with the ESVCLP regime is that it can be unnecessarily burdensome and costly for investors to need to constantly monitor whether an investee company continues to satisfy valuation thresholds. So we urge the government that the provisions of this new incentive be drafted in a way that minimises uncertainty and the burden of complying such that it becomes effective in achieving their aim of encouraging equity investment into Australian start-ups.”
Senior Communications Manager, KPMG Australia
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