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Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016

Schedule 1 Tax incentives for early stage investors

Part 1 Main amendments

Income Tax Assessment Act 1997

1  After Division 355

Insert:

Division 360 Early stage investors in innovation companies

Table of Subdivisions

360-A   Tax incentives for early stage investors in innovation companies

Subdivision 360-A Tax incentives for early stage investors in innovation companies

Guide to Subdivision 360-A

360-5   What this Subdivision is about

You may be entitled to a tax offset if you are, or a trust or partnership of which you are a member is, issued with certain kinds of equity interests in a small Australian company with high-growth potential that is engaging in innovative activities.

A modified CGT treatment may also apply to those equity interests.

Table of sections

Operative provisions

360-10      Object of this Subdivision

360-15      Entitlement to the tax offset

360-20      Limited entitlement for certain kinds of investors

360-25      Amount of the tax offset—general case

360-30      Amount of the tax offset—members of trusts or partnerships

360-35      Amount of the tax offset—trustees

360-40      Early stage innovation companies

360-45      100 point innovation test

360-50      Modified CGT treatment

360-55      Modified CGT treatment—partnerships

360-60      Modified CGT treatment—not affected by certain roll-overs

360-65      Separate modified CGT treatment for roll-overs about wholly-owned companies or scrip for scrip roll-overs

Operative provisions

360-10   Object of this Subdivision

                   The object of this Subdivision is to encourage new investment in small Australian innovation companies with high-growth potential by providing qualifying investors with a tax offset and a modified CGT treatment.

360-15   Entitlement to the tax offset

General case

             (1)  You are entitled to a * tax offset for an income year if:

                     (a)  you are none of the following:

                              (i)  a trust or a partnership;

                             (ii)  a * widely held company or a * 100% subsidiary of a widely held company; and

                     (b)  at a particular time during the income year, a company issues you with * equity interests that are * shares in the company; and

                     (c)  subsection 360-40(1) (about early stage innovation companies) applies to the company immediately after that time; and

                     (d)  neither you nor the company is an * affiliate of each other at that time; and

                     (e)  the issue of those shares is not an * acquisition of * ESS interests under an * employee share scheme; and

                      (f)  immediately after that time, you do not hold more than 30% of the equity interests in the company or in an entity * connected with the company.

Members of trusts or partnerships

             (2)  A * member of a trust or partnership at the end of an income year is entitled to a * tax offset for the income year if the trust or partnership would be entitled to a tax offset, under subsection (1), for the income year if the trust or partnership were an individual.

Trustees

             (3)  A trustee of a trust is entitled to a * tax offset for an income year if:

                     (a)  the trustee would be entitled to a tax offset, under subsection (1), for the income year if the trustee were an individual; and

                     (b)  the trustee is liable to be assessed or has been assessed, and is liable to pay * tax, on a share of, or all or a part of, the trust’s * net income under section 98, 99 or 99A of the Income Tax Assessment Act 1936 for the income year.

360-20   Limited entitlement for certain kinds of investors

             (1)  You do not satisfy paragraph 360-15(1)(b) if:

                     (a)  for each offer resulting in * equity interests that are * shares in the company being issued to you during the income year, none of subsections 708(8), (10) or (11) of the Corporations Act 2001 removed the need for a disclosure document; and

                     (b)  a total of more than $50,000 was paid for the issue to you of the shares resulting from all of those offers.

             (2)  For the purposes of this section, assume that Chapter 6D of the Corporations Act 2001 applies to those offers.

360-25   Amount of the tax offset—general case

             (1)  If subsection 360-15(1) applies, the amount of the * tax offset is 20% of the total amount paid for the * shares to which paragraph 360-15(1)(b) applies.

Note:          If subsection 360-15(1) applies for shares issued to you at several times during the income year, then this subsection uses the total amount paid for all of those shares.

             (2)  However, reduce this amount to the extent necessary to ensure that the sum of the following does not exceed $200,000:

                     (a)  the sum of the * tax offsets under this Subdivision for the income year for which you and your * affiliates (if any) are entitled;

                     (b)  the sum of the tax offsets under this Subdivision that you and your affiliates (if any) carry forward to the income year.

360-30   Amount of the tax offset—members of trusts or partnerships

             (1)  If subsection 360-15(2) applies, the amount of the * member’s * tax offset for the income year is as follows:

where:

determined share of notional tax offset is the percentage determined under subsection (2) for the * member.

notional tax offset amount is what would, under section 360-25, have been the amount of the trust’s or partnership’s * tax offset (the notional tax offset ) if the trust or partnership had been an individual.

             (2)  The trustee or partnership may determine the percentage of the notional tax offset that is the * member’s share of the notional tax offset.

             (3)  If the * member would be entitled to a fixed proportion of any * capital gain from a * disposal were the disposal to happen in relation to the trust or partnership at the end of the income year, then:

                     (a)  the percentage determined under subsection (2) must be equivalent to that fixed proportion; and

                     (b)  a determination of any other percentage has no effect.

             (4)  The trustee or partnership must give the * member written notice of the determination. The notice:

                     (a)  must enable the member to work out the amount of the member’s * tax offset by including enough information to enable the member to work out the member’s share of the notional tax offset; and

                     (b)  must be given to the member within 3 months after the end of the income year, or within such further time as the Commissioner allows.

             (5)  The sum of all the percentages determined under subsection (2) in relation to the * members of the trust or partnership must not exceed 100%.

360-35   Amount of the tax offset—trustees

                   If subsection 360-15(3) applies, the amount of the * tax offset is the difference between:

                     (a)  what would, under section 360-25, have been the amount of the tax offset to which the trustee would have been entitled if the trustee had been an individual; and

                     (b)  if * members of the trust are entitled to tax offsets under subsection 360-15(2) arising from the same * shares to which the trustee’s entitlement arises under subsection 360-15(3)—the sum of the amounts, under section 360-30, of those tax offsets.

360-40   Early stage innovation companies

             (1)  This subsection applies to a company at a particular time (the test time ) in an income year (the current year ) if:

                     (a)  the company was:

                              (i)  incorporated in Australia within the last 3 income years (the latest being the current year); or

                             (ii)  incorporated in Australia within the last 6 income years (the latest being the current year), and across the last 3 of those income years it and its * 100% subsidiaries (if any) incurred total expenses of $1 million or less; or

                            (iii)  registered in the * Australian Business Register within the last 3 income years (the latest being the current year); and

                     (b)  the company and its 100% subsidiaries (if any) incurred total expenses of $1 million or less in the income year before the current year; and

                     (c)  the company and its 100% subsidiaries (if any) had a total assessable income of $200,000 or less in the income year before the current year; and

                     (d)  at the test time, none of the company’s * equity interests are listed for quotation in the official list of any stock exchange in Australia or a foreign country; and

                     (e)  at the test time, the company has at least 100 points under section 360-45, or:

                              (i)  the company is genuinely focussed on developing for commercialisation one or more new, or significantly improved, products, processes, services or marketing or organisational methods; and

                             (ii)  the business relating to those products, processes, services or methods has a high growth potential; and

                            (iii)  the company can demonstrate that it has the potential to be able to successfully scale that business; and

                            (iv)  the company can demonstrate that it has the potential to be able to address a broader than local market, including global markets, through that business; and

                             (v)  the company can demonstrate that it has the potential to be able to have competitive advantages for that business.

             (2)  For the purposes of paragraph (1)(c), disregard any Accelerating Commercialisation Grant under the program administered by the Commonwealth known as the Entrepreneurs’ Programme.

             (3)  Subparagraphs (1)(e)(i) to (v) cannot be satisfied for:

                     (a)  a product, process, service or method; or

                     (b)  an improvement to a product, process, service or method;

that is of a kind prescribed by regulations made for the purposes of this subsection.

             (4)  Subsection (1) does not apply to a company if, before the test time, the company engaged in an activity of a kind prescribed by regulations made for the purposes of this subsection.

360-45   100 point innovation test

             (1)  At a particular time (the test time ) in an income year (the current year ), a company has the points mentioned in an item of the following table if that item applies to the company at that time.

 

Innovation points potentially available at that time in the current year

 

Column 1

Column 2

Item

Points

Innovation criteria

1

75

At least 50% of the company’s total expenses for the previous income year is expenditure that the company can notionally deduct for that income year under section 355-205 (about R&D expenditure).

2

75

The company has received an Accelerating Commercialisation Grant under the program administered by the Commonwealth known as the Entrepreneurs’ Programme.

3

50

At least 15%, but less than 50%, of the company’s total expenses for the previous income year is expenditure that the company can notionally deduct for that income year under section 355-205 (about R&D expenditure).

4

50

(a) the company has completed or is undertaking an accelerator program that:

(i) provides time-limited support for entrepreneurs with start-up businesses; and

(ii) is provided to entrepreneurs that are selected in an open, independent and competitive manner; and

(b) the entity providing that program has been providing that, or other accelerator programs for entrepreneurs, for at least 6 months; and

(c) such programs have been completed by at least one cohort of entrepreneurs.

5

50

(a) a total of at least $50,000 has been paid for * equity interests that are * shares in the company; and

(b) the company issued those shares to one or more entities that:

(i) were not * associates of the company immediately before the issue of those shares; and

(ii) did not * acquire those shares primarily to assist another entity become entitled to a * tax offset (or a modified CGT treatment) under this Subdivision; and

(c) the company issued those shares at least one day before the test time.

6

50

(a) the company has rights (including equitable rights) under a * Commonwealth law as:

(i) the patentee, or a licensee, of a standard patent; or

(ii) the owner, or a licensee, of a plant breeder’s right;

      granted in Australia within the last 5 years (ending at the test time); or

(b) the company has equivalent rights under a * foreign law.

7

25

Unless item 6 applies to the company at the test time:

(a) the company has rights (including equitable rights) under a * Commonwealth law as:

(i) the patentee, or a licensee, of an innovation patent granted and certified in Australia; or

(ii) the owner, or a licensee, of a registered design registered in Australia;

      within the last 5 years (ending at the test time); or

(b) the company has equivalent rights under a * foreign law.

8

25

The company has a written agreement with:

(a) an institution or body listed in Schedule 1 to the Higher Education Funding Act 1988 (about institutions or bodies eligible for special research assistance); or

(b) an entity registered under section 29A of the Industry Research and Development Act 1986 (about research service providers);

to co-develop and commercialise a new, or significantly improved, product, process, service or marketing or organisational method.

             (2)  At the test time, the company also has the points prescribed by regulations made for the purposes of this subsection if the prescribed innovation criteria for those points apply to the company at that time.

360-50   Modified CGT treatment

             (1)  This section applies if the issuing of a * share to an entity gives rise to an entitlement to a * tax offset under this Subdivision.

Note:          This section applies to any share that gives rise to the entitlement, regardless of whether subsection 360-25(2) reduces the amount of the tax offset.

             (2)  The entity is taken to hold the * share on capital account.

             (3)  The entity must disregard any * capital loss it makes from any * CGT event happening in relation to the * share if:

                     (a)  the entity has continuously held the share since its issue; and

                     (b)  the CGT event happens before the tenth anniversary of the issue of the share.

             (4)  The entity may disregard any * capital gain it makes from any * CGT event happening in relation to the * share if:

                     (a)  the entity has continuously held the share since its issue; and

                     (b)  the CGT event happens on or after the first anniversary, but before the tenth anniversary, of the issue of the share.

             (5)  If the entity has continuously held the * share since its issue, the * first element of its * cost base and * reduced cost base becomes, on the tenth anniversary of its issue, its * market value on that anniversary.

360-55   Modified CGT treatment—partnerships

             (1)  The purpose of this section is to ensure that the modifications made by section 360-50 apply to each partner in a partnership in a case where the partnership is the entity that is issued with the * share mentioned in subsection 360-50(1).

             (2)  In such a case, subsections 360-50(2) to (4) apply as if:

                     (a)  the first reference in those subsections to the entity were a reference to each partner in the partnership; and

                     (b)  the first reference in those subsections to the * share were a reference to the partner’s interest in the share.

Note:          The references to the entity and the share in the paragraphs of subsections 360-50(3) and (4) continue to apply unchanged.

             (3)  In such a case, treat subsection 360-50(5) as if it read as follows:

“If the partnership has continuously held the * share since its issue, on the tenth anniversary of its issue:

                     (a)  the * first element of the * cost base for a partner’s interest in the share becomes so much of the share’s * market value on that anniversary as is calculated by reference to the partnership agreement, or partnership law if there is no agreement; and

                     (b)  the * first element of the * reduced cost base is worked out similarly.”.

360-60   Modified CGT treatment—not affected by certain roll-overs

             (1)  The purpose of this section is to ensure that the modifications made by section 360-50 are not affected merely because of one or more * same-asset roll-overs or * replacement-asset roll-overs (other than roll-overs under Division 122 or Subdivision 124-M).

             (2)  If, apart from those roll-overs, the entity (the original entity ) mentioned in subsection 360-50(1) would continue to hold the * share (the original share ) mentioned in that subsection, then subsections 360-50(2) to (5) apply as if:

                     (a)  the following asset were the original share:

                              (i)  if the last roll-over is a * same-asset roll-over—the asset for the roll-over;

                             (ii)  if the last roll-over is a * replacement-asset roll-over—the replacement asset for the roll-over; and

Note:       The asset for subparagraph (i) will be the original share unless a replacement-asset roll-over happened beforehand.

                     (b)  that asset was issued when the original share was issued; and

                     (c)  the entity that * acquired that asset for the roll-over had continuously held that asset since the original share was issued; and

                     (d)  that entity were the original entity; and

                     (e)  in a case where that entity is a partnership—paragraphs (a) to (d) modify subsections 360-50(2) to (5) as they apply with the modifications in section 360-55; and

                      (f)  in a case where that entity is not a partnership but the entity that owned the original asset for the roll-over is—paragraphs (a) to (d) modify subsections 360-50(2) to (5) as they apply without the modifications in section 360-55.

Note:          A roll-over under Division 122 (about wholly-owned companies) or Subdivision 124-M (about scrip for scrip roll-overs) will stop the modified CGT treatment under section 360-50 from continuing to apply.

360-65   Separate modified CGT treatment for roll-overs about wholly-owned companies or scrip for scrip roll-overs

             (1)  If:

                     (a)  a * share mentioned in subsection 360-50(1) has been continuously held by the entity mentioned in that subsection; and

                     (b)  then:

                              (i)  the share, or interests in the share, are * disposed of in a way that gives rise to a trigger event (see section 122-15 or 122-125) for a roll-over under Division 122; or

                             (ii)  the share becomes the original interest (see paragraph 124-780(1)(a)) for a roll-over under Subdivision 124-M; and

                     (c)  the roll-over happens on or after the first anniversary, but before the tenth anniversary, of the issue of the share;

the * first element of the * cost base and * reduced cost base of the share just before the roll-over is taken to be its * market value at that time.

Note:          This subsection is a separate modified CGT treatment, and not a continuation of the modifications made by section 360-50.

             (2)  If:

                     (a)  an asset mentioned in paragraph 360-60(2)(a) for a roll-over has been continuously held by the entity that * acquired that asset for that roll-over; and

                     (b)  then:

                              (i)  that asset, or interests in that asset, are * disposed of in a way that gives rise to a trigger event (see section 122-15 or 122-125) for a roll-over under Division 122; or

                             (ii)  that asset becomes the original interest (see paragraph 124-780(1)(a)) for a roll-over under Subdivision 124-M; and

                     (c)  the later roll-over happens on or after the first anniversary, but before the tenth anniversary, of the issue of the original share (see subsection 360-60(2) for the earlier roll-over;

the * first element of the * cost base and * reduced cost base of that asset just before the later roll-over is taken to be its * market value at that time.

Note:          This subsection is a separate modified CGT treatment, and not a continuation of the modifications made by section 360-50.

Part 2 Other amendments

Income Tax Assessment Act 1936

2  Subsection 177A(1)

Insert:

innovation tax offset means a tax offset allowed under:

                     (a)  Subdivision 61-P (about early stage venture capital limited partnerships) of the Income Tax Assessment Act 1997 ; or

                     (b)  Subdivision 360-A (about early stage investors in innovation companies) of that Act.

3  After paragraph 177C(1)(bb)

Insert:

                (bbaa)  an innovation tax offset being allowable to the taxpayer where the whole or a part of that innovation tax offset would not have been allowable, or might reasonably be expected not to have been allowable, to the taxpayer if the scheme had not been entered into or carried out; or

4  After paragraph 177C(1)(f)

Insert:

                  (faa)  in a case where paragraph (bbaa) applies—the amount of the whole of the innovation tax offset or of the part of the innovation tax offset, as the case may be, referred to in that paragraph; and

5  At the end of subsection 177C(2)

Add:

               ; or (e)  an innovation tax offset being allowable to the taxpayer the whole or a part of which would not have been, or might reasonably be expected not to have been, allowable to the taxpayer if the scheme had not been entered into or carried out, where:

                              (i)  the allowance of the innovation tax offset to the taxpayer is attributable to the making of a declaration, agreement, election, selection or choice, the giving of a notice or the exercise of an option by any person, being a declaration, agreement, election, selection, choice, notice or option expressly provided for by this Act; and

                             (ii)  the scheme was not entered into or carried out by any person for the purpose of creating any circumstance or state of affairs the existence of which is necessary to enable the declaration, agreement, election, selection, choice, notice or option to be made, given or exercised, as the case may be.

6  Subsection 177C(3)

Omit “or (d)(i)”, substitute “, (d)(i) or (e)(i)”.

7  After paragraph 177C(3)(ca)

Insert:

                  (caa)  the allowance of an innovation tax offset to a taxpayer; or

8  After paragraph 177C(3)(g)

Insert:

                    (ga)  the innovation tax offset would not have been allowable; or

9  After paragraph 177CB(1)(d)

Insert:

                  (daa)  the whole or a part of an innovation tax offset not being allowable to the taxpayer;

10  After paragraph 177F(1)(d)

Insert:

                   (da)  in the case of a tax benefit that is referable to an innovation tax offset, or a part of an innovation tax offset, being allowable to the taxpayer—determine that the whole or a part of the innovation tax offset, or the part of the innovation tax offset, as the case may be, is not to be allowable to the taxpayer; or

11  After paragraph 177F(3)(d)

Insert:

                   (da)  if, in the opinion of the Commissioner:

                              (i)  an amount would have been allowed, or would be allowable, to the relevant taxpayer as an innovation tax offset if the scheme had not been entered into or carried out, being an amount that was not allowed or would not, apart from this subsection, be allowable, as the case may be, as an innovation tax offset to the relevant taxpayer; and

                             (ii)  it is fair and reasonable that the amount, or a part of the amount, should be allowable as an innovation tax offset to the relevant taxpayer;

                            determine that that amount or that part, as the case may be, should have been allowed or is allowable, as the case may be, as an innovation tax offset to the relevant taxpayer; or

Income Tax Assessment Act 1997

12  Section 13-1 (before table item headed “inter-corporate dividends”)

Insert:

innovation companies

 

certain shares issued to early stage investors...................

Subdivision 360-A

13  Subsection 63-10(1) (before table item 35)

Insert:

33

* Tax offset under Subdivision 360-A (about early stage investors in innovation companies)

You may carry it forward to a later income year (under Division 65)

14  Section 112-97 (at the end of the table)

Add:

37

The issuing of a share gives rise to an entitlement to a tax offset under Subdivision 360-A

First element of cost base and reduced cost base

Sections 360-50, 360-55, 360-60 and 360-65

Taxation Administration Act 1953

15  Section 45-340 in Schedule 1 (method statement, step 1, after paragraph (g))

Insert:

             (ga)     Subdivision 360-A of the Income Tax Assessment Act 1997 (the tax offset for early stage investors in innovation companies); or

16  Section 45-375 in Schedule 1 (method statement, step 1, after paragraph (f))

Insert:

             (fa)     Subdivision 360-A of the Income Tax Assessment Act 1997 (the tax offset for early stage investors in innovation companies); or

17  Section 396-55 in Schedule 1 (at the end of the table)

Add:

10

a company

the issuing by the company of a * share that could give rise to an entitlement to a * tax offset (or a modified CGT treatment) under Subdivision 360-A of the Income Tax Assessment Act 1997

18  Paragraph 396-60(1)(a) in Schedule 1

Repeal the paragraph, substitute:

                     (a)  must relate to:

                              (i)  the identification, collection or recovery of a possible * tax-related liability; or

                             (ii)  the identification of a possible reduction of a possible tax-related liability;

                            of a party to the transaction (disregarding any exemption under a * taxation law that may apply to those parties); and

Part 3 Application of amendments

19  Application of amendments

The amendments made by this Schedule apply in relation to equity interests issued on or after the commencement of this Schedule.