What the election outcome could mean for start-ups, investors and employees
The election is over and Malcolm is here to stay. BUT, can he still deliver for our start-ups, employees and investors under the National Innovation and Science Agenda? Aneeka Munshey explores part of the Agenda, including potential tax savings, lighter regulation and increased access to crowd funding.
In the wash up of the tight federal election, and the resultant slight majority and varied Senate, will the Coalition government be able to deliver on its promised innovation agenda? In particular, will the government be able to implement its economic policy initiatives that focus on the “ideas boom” and an ambitious start-up agenda?
On 7 December 2015, the release of Malcolm Turnbull’s National Innovation and Science Agenda (NISA) was a welcome development given Australia’s National Innovation System had been in steady decline for some time. At its core, the policy objectives were uncontroversial; innovation and science will deliver new sources of growth, jobs and economic prosperity. A focus on research and development will boost every sector of the economy from healthcare, education and agriculture, to defence and transport.
The Coalition wants to make it easier for Australian businesses to compete in the world economy. It intends to do so by investing $1.1 billion over four years to incentivise early stage investment in start-ups, innovation, entrepreneurship and reward risk taking.
To achieve the above, the government has principally focused on changes to taxation and company regulation. We look at three such proposals:
- Tax Incentives for Investors
- Crowd-sourced Equity funding
- Employee Share Schemes
Tax incentives for Investors
From 1 July 2016, if you invest in a qualifying early stage innovation company (ESIC), you may be eligible for tax incentives. The tax incentives provide eligible investors who purchase new shares in an ESIC with a:
- Non-refundable carry forward tax offset equal to 20% of the amount paid for their qualifying investments. This is capped at a maximum tax offset amount of $200,000 for the investor and their affiliates combined in each income year.
- Modified capital gains tax (CGT) treatment, under which capital gains on qualifying shares that are continuously held for at least 12 months and less than ten years may be disregarded. Capital losses on shares held less than ten years must be disregarded.
To be eligible for these tax incentives, investors must either: (i) meet the 'sophisticated investor' test under the Corporations Act 2001 (Cth); or (ii) have made a total investment in qualifying ESICs in an income year of $50,000 or less.
Crowd-sourced Equity Funding
Crowd-sourced funding (CSF) is a type of corporate capital raising whereby a company seeks funds in small amounts from a large number of individual investors in return for securities of the company. It is a rapidly evolving industry, typically online, which provides an additional platform for start-ups to find support and raise funds for a project or venture.
The current regulatory framework creates a barrier to CSF as proprietary companies (limited to 50 non-employee shareholders) are prohibited from making public offers of securities, while public companies are subject to onerous and costly governance, reporting and disclosure requirements. The Federal Government’s proposed Corporations Amendment (Crowd-sourced Funding) Bill 2015 intends to provide a diverse range of funding options for businesses to raise equity from the general public, while ensuring adequate investor protection via licensed intermediaries, whose ‘gatekeeper’ obligations to conduct prescribed checks maintain the integrity of the CSF regime.
Under the proposal, eligible Australian public companies with less than $5 million in turnover and gross assets (inclusive of the turnover of any related body corporate of the company), will be able to raise up to $5 million per year from the general public in return for equity in their company via an intermediary. The regime prescribes limits on retail investment, whereby retail clients can invest up to $10,000 per issuer, per 12 month period (the investor cap). Sophisticated and professional investors will not be subject to the investor cap.
Further, for companies that become public to access the scheme, there will be a relaxation of the standard corporate governance, reporting and disclosure requirements applicable to public companies, for a period of up to five years.
To this end, the proposed reforms prescribe disclosure requirements applicable to CSF offers to ensure that investors have the key facts about the company. CSF offers will include information about the company and its business, the securities on offer, how the proceeds from the CSF offer will be used, however it is not necessary to include the actual CSF offer. Further, unlike other disclosure documents, the CSF offer document will not need to be lodged with ASIC. The amendments require the offer document to be published on the platform of the intermediary.
Although the Bill was passed by the lower house, it lapsed before it could be passed by the Senate. It is expected that the Government will reintroduce the Bill given the apparent bipartisan support.
Employee Share Schemes
In Australia, the tax treatment of Employee Share Schemes (ESS) has created a disincentive to start-ups and their potential employees.
However, on 1 July 2015, changes to the tax treatment of share options including tax concessions have created new opportunities for start-ups. The ATO has defined a start-up company as follows:
- the company has had an aggregated turnover of less than $50 million in the income year prior to the year the interests are granted;
- the company (and its corporate group) must not have any interests listed on an approved stock exchange in the income year prior to the ESS interest being offered;
- the company has been incorporated for less than 10 years; and
- the employing company (which can be a subsidiary of the company granting the ESS interests being offered) must be an Australian resident taxpayer.
Under the ESS start up concession rules, and provided certain conditions are met, options will not be taxed on grant, vesting or exercise. Rather, employees will be subject to CGT when the shares are sold, with significant CGT discounts available in certain circumstances, potentially halving the employee’s effective tax rate.
There are numerous conditions to be met, and benefits to be achieved under the regime, including (but not limited to):
- options must have an exercise price ≥ current market value of the share, as at date of grant;
- options will not be subject up front taxation, provided the employee holds the interest for no less than three years (from date of issue);
- shares can be issued at a discount up to 15% of market value, such discount also exempt from CGT and income tax. CGT is calculated on the market value when the share was acquired; and
- employees cannot hold more than 10% total ownership/voting rights (including vested and unvested options).
ESS provide an advantage for start-ups who are looking to attract talent when they are the most cash poor. However, current disclosure requirements under the Corporations Act 2001 (Cth) can discourage start-ups from implementing an ESS, particularly because they are costly to produce and may result in the release of commercially sensitive information which competitors can capitalise on.
The government has proposed new reforms to limit the requirement for disclosure documents given to employees under an ESS to be made available to the public. Further, the government intends to consult with industry on options to make ESS more user friendly.
Employers should explore ESS for their business as an attractive way to incentivise employees.
What does the future hold?
The above proposals are certainly intended to reduce the barriers for start-ups. However, the focus now will be on implementation, to enable and encourage start-ups to access the benefits of the government’s proposals.For further information on any of the above proposals, or to talk about how you might benefit from some of these initiatives, contact Aneeka Munshey, on (03) 8673 5555 or firstname.lastname@example.org.
About the author
Aneeka MunsheySenior Associate
Aneeka's core focus is in commercial law, litigation and dispute resolution, employment law and franchising.
Working closely with start-ups and SMEs, Aneeka has a holistic approach to solving the legal issues faced by her clients, including commercial disputes, employment/workplace issues, restructures, intellectual property protection, family law and estates. She also proactively ident...