A 20% tax offset on investments in startups.
The Start up Investment Scheme will promote investment in innovative, high-growth potential startups by providing concessional tax treatment for investors.
In a 2013 report, PricewaterhouseCoopers estimated that startups have the potential to contribute $109 billion to the Australian economy and create 540,000 jobs by 2033. The report also found that funding for startups is in short supply.
Around 4,500 startups miss out on equity finance each year and access to additional finance is reported as one of the main barriers to innovation for startups.
This measure is based on the UK’s successful Seed Enterprise Investment Scheme, which resulted in over AUD$500 million of early stage investment for almost 2,900 companies in its first two years.
The Start up Investment Scheme includes:
- A 20 per cent non-refundable tax offset on investment capped at $200,000 per investor, per year.
- A 10 year capital gains tax exemption for investments held for three years.
The new tax incentives are available for eligible investments made on or after 1 July 2016.
To be eligible for the Start up Investment Scheme, an investor must meet the ‘sophisticated investor’ test under the Corporations Act 2001 or, if the investor does not meet this test, their total investment in qualifying companies must be $50,000 or less for that income year.
The Start up Investment Scheme will be available for investments in companies that satisfy two requirements:
- That the company is early stage, determined against criteria related to expenditure, assessable income, stock exchange listing and incorporation.
- That the company is involved in innovation, determined by allowing the company to self‑assess against either a principles-based test or a points-based gateway test, or by receiving a determination from the Australian Tax Office.
The scheme is based on the successful UK Seed Enterprise Investment Scheme which raised over AUD$500 million in startup investment for almost 2,900 companies in its first two years.
Case Study – PaySmart Pty Ltd
Jessica is the founder of a startup business called PaySmart Pty Ltd that is developing a software application to automate bill payments. She is looking to raise $200,000 in equity finance to continue developing the software.
Alex is an experienced early stage (angel) investor and believes that PaySmart has excellent growth potential. He invests $200,000 and claims a 20 per cent non-refundable tax offset, reducing his income tax payable by $40,000.
In addition to contributing capital, Alex uses his business skills to help PaySmart grow. He sells his shares for $400,000 four years later. As Alex’s investment in PaySmart is a qualifying investment and has been held for between 12 months and 10 years, the full capital gain of $200,000 is exempt from capital gains tax.