Collecting points in the Tax Act…

I have to start by telling you I am not making this up.

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Today the Government released the Bill for the “innovation” changes announced last year. in the Bill, called the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016, and in this Bill are some amazing concessions for investors in certain companies.

These investors in the equity of these companies can receive a non-refundable carry-forward tax offset of 20 per cent of the value of their investment subject to a maximum offset cap amount of $200,000. In addition, investors may disregard capital gains realised on shares that have been held for between one and ten years (Investors must disregard any capital losses realised on these shares held for less than ten years).

S0 you invest $200,000 in one of these companies, get a $40,000 tax offset straight away and can ignore paying any CGT on the gain for the next ten years… Awesome.

PS… the investor does not need to be an Aussie resident, any entity can invest, non-sophisticated investors are limited to investing amounts of $50,000 not $200,000, the shares must be newly issued shares not under an ESAS, the shares cannot be preference shares, the investor and the company cannot be affiliates, the investor and their affiliates cannot own more than 30% after the acquisition… yes it is already a dog’s breakfast but trust me it get worse…

“So let me at it” you say. “What type of companies can I invest in and get all these goodies?” There are two tests that a company must pass to be the type of company I can buy new shares in and get these goodies.

The first is the “early stage test”. This requires the company to be either incorporated in the last three years, or registered on the ABR in the last three years, or been incorporated in the last 6 years and have spent less than $1,000,000 total (as shown on company tax returns). In addition, any company that meets these conditions must also have total expenses of $1 million or less in the previous year, assessable income of $200,000 in the previous year and not listed on the stock exchange. All objective tests.

But when you hit the second test, the “innovation test”, it becomes obvious that the people who wrote this law had absolutely no idea on how to objectively define innovation. The innovation test is “principle based” and the principles to assess if you pass the test are

Genuinely focused on developing its new or significantly improved innovation for the purpose of commercialisation and show that the business relating to that innovation has the potential for high growth, has scalability, can address a broader than local market and has competitive advantages.

Could they be any more vague?!? According to the EM every single part of this definition is a separate “principle based” test that needs to be passed.

And the Government seems to have missed the point that a company can do more than one activity and one activity might pass this test (if we can work out what it means) and one cannot. What do we do then?

But they know they understand that no one will really be able to assess if they meet such a vague and uncommercial test so they offer an alternate test with an objective standard.

I am not making this up…

As an alternative to satisfying the “principle-based so vague you could never assess it innovation” test (my new name for it), companies can collect points and if they collect 100 points then they will be treated as passing the innovation test. Yes, the tax law now lets you collect “points”.

How do I get these points:

1.  A company will be awarded 75 points if it has at least 50 per cent of its total expenses for the previous income year constituting expenses which are eligible for the tax offset for R&D activities provided under Division 355.

2.  A company will be awarded 50 points if it has at least 15 and less than 50 per cent of its total expenses for the previous income year constituting expenses which are eligible for the tax offset for R&D activities provided under Division 355

3.  A company will be awarded 75 points if, at any time, it has received an Accelerating Commercialisation Grant under the Accelerating Commercialisation element of the Commonwealth’s Entrepreneurs’ programme.

4.  A company will be awarded 50 points if it is undertaking or has completed an eligible accelerator programme (whatever that is…).

5.  A company will be awarded 50 points if it has previously (at least one day before) issued shares to a third party, provided that the third party paid at least $50,000 for those shares and was not an associate.

6.  A company will be awarded 50 points if it has one or more enforceable rights on an innovation through a standard patent or plant breeder’s right that has been granted in Australia or an equivalent intellectual property right granted in another country.

7.  A company will be awarded 25 points if it has one or more enforceable rights on an innovation through an innovation patent or design right or an equivalent intellectual property right granted in another country.

8.  A company will be awarded 25 points if it has a written agreement to co-develop and commercialise an innovation with specific research organisations or universities

 

Yes, it is true. Go out and start collecting points and if you have enough, you can give special benefits to your investors (the easiest way is to do $1 of R&D in a year with no other expenses and get 75 points and then get a design right in Uzbekistan and get 25 points).

There are two other options if you can’t find enough points.

First you can just “wing it” and hope that your company is innovative. But when the investors claim their concession, the Commissioner will be visiting very quickly and you will need to prove you meet the unbelievably vague innovation test.

Second, you can seek a ruling from the Commissioner about whether their circumstances satisfy the innovation test. In providing a ruling, the EM states that the ATO may need to consult with the Department of Industry, Innovation and Science. This does mean you will have two Government agencies considering if you are:

genuinely focused on developing its new or significantly improved innovation for the purpose of commercialisation and show that the business relating to that innovation has the potential for high growth, has scalability, can address a broader than local market and has competitive advantages.

That sounds like a fun experience for a company. And remember, this is to allow the company to get more investors, it does not give you any direct benefit. Lets hope the fee consultants charge for doing this process of proving to two Government entities you meet this vague test is less than the actual investment the company gets (I doubt it!).

In summary, this is pretty much a dog’s breakfast. The principle base test is too vague to be of any use. The cost of proving the principle based test will be too high. And the objective test pretty much only gives you points if you have already registered with other government type entities for other benefits (R&D Tax Incentive with innovation Australia, Patents or other IP with IP Australia, Commercialisation grants with the Department of Industry, some research organisation agreements have their funding from the government who can vet third party agreements…) so the test is a cop out as it requires other Government entities to do the review of the company.

This was a policy that sounded great but does not work in practice. But lets wait and see how many people claimed the tax offset in their 2016/17 tax return. And when it is less than 2,000 can we repeal this law please.

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
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