Tax concessions for early stage investors

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From 1 July 2016, changes have been made to encourage investment into early stage Australian businesses as part of a push for greater innovation in Australia. These changes offer attractive tax benefits for investors.

Incentives for Early Stage Investors

The incentive for early stage investors includes a non-refundable tax offset and a CGT exemption for investors as follows:

  • A 20% non-refundable carry forward tax offset on amounts paid for newly issued shares in early stage “innovation companies” or “qualifying innovation funds”. Innovation is measured by reference to a 100 point innovation test.
  • The company or trust must not be an affiliate of the investor and the investor must not own more than 30% of the company or trust.
  • The offset is limited to a maximum of $200,000 per investment ($50,000 for non-sophisticated investors).
  • Gains (and losses) on the disposal of these shares are tax free (provided that they have been held for at least 12 months).
  • Only the gain for the first 10 years is tax free. Any additional gain after 10 years is taxable.

Tax Concessions for Early Stage Venture Capital Limited Partnerships (ESVCLP)

These concessions apply to investors in eligible ESVCLPs as follows:

  • A 10% non-refundable carry forward tax offset on amounts contributed to ESVCLP.
  • Income flows through the ESVCLP and is taxed at the partner level.
  • Capital gains or losses made on the disposal of an investment by the ESVCLP with assets up to $250m are disregarded for tax. Where assets exceed $250m, a partial CGT exemption is available.

There are strict conditions around what types of partnerships will qualify as eligible ESVCLPs. In summary:

  • The partnership agreement must be for a period between 5 and 15 years.
  • The ESVCLP must be registered with Innovation Australia.
  • The ESVCLP must have committed capital of between $10m and $200m.
  • Subject to some exceptions, each investor (together with their connected entities) is limited to contributing no more than 30% of the committed capital of the ESVCLP.
  • The ESVCLP must have an appropriate investment plan and access to appropriate management expertise.
  • The ESVCLP sole business must be to invest in eligible venture capital investments.

Eligible investments are the acquisition of new shares or units in unlisted Australian businesses in their early stages of development which have total assets of less than $50m. They cannot be involved in ineligible activities (eg. property development, land ownership, certain financing activities, construction etc). Further, any single investment must not represent more than 30% of the ESVCLP’s committed capital.

If you are considering investing in the early stages of a business, we recommend that you speak to Mutual Trust to determine your eligibility for these concessions. To those who qualify, there are significant tax benefits which can enhance the return on an investment.

Mutual Trust Pty Ltd ACN 004 285 330 (AFSL 234590). Liability limited by a scheme approved under Professional Standards Legislation. For participating members (other than for the acts or omissions of Australian Financial Services Licensees). This information is general in nature and subject to change. It does not constitute tax, legal or financialadvice. We recommend you seek advice specific to your circumstances before taking any action. Copyright © 2014 Mutual Trust Pty Ltd.
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