It’s always difficult for Governments and regulators to keep pace with changing business models, funding approaches, and technology. But, recent reforms and a series of new initiatives seek to free up entrepreneurs from excessive regulation, inflexible tax regimes, and unintended outcomes. Unfortunately, few entrepreneurs are aware of what is available to them and risk limiting their options for growth. Two options are ‘Tax Relief for business changing structures’, and ‘Incentives for angel investors’:
Tax relief for business changing structures
It is common for a business to outgrow its business structure. Alternatively, changes in circumstances over time might mean that a business structure is no longer as effective as it could be. Small business entities can now rollover from one business structure to another without triggering adverse implications under the income tax system.
Under new rules that apply from 1 July 2016, if your business genuinely needs to move from one structure to another for commercial reasons, you can do this without triggering a tax bill if certain conditions are met. This new form of rollover relief can provide complete income tax relief when assets are transferred to any business structure (e.g., sole trader, partnership, company or trust) if the following key conditions are satisfied:
- The transaction is a genuine restructure of an ongoing business. So, the concessions can’t be used for winding down or selling a business.
- Each of the parties to the transaction is a small business entity (revenue under $2m, although this might be increased to $10m) or is related to a small business entity in the year the transaction occurs. The turnover test is subject to some grouping rules.
- The business owners (the people who have ultimate economic ownership of the assets) and their share in those assets doesn’t materially change.
- The asset being transferred is currently being used in a business carried on by the current owner or certain related parties.
- Both the original entity and the entity the business is being transferred into need to be Australian residents.
- The parties involved in the transaction must choose jointly to apply the rollover.
- None of the entities involved in the transaction are a superannuation fund or exempt entity.
Incentives for angel investors
For innovative companies, it’s often difficult to get funding before what they are developing is commercialised. Early stage innovation investment (often called ‘angel investors’), in pre-commercialised developments is often very risky but when it works, the rewards can be great.
New tax laws offer incentives for investment in these early stage innovation companies (ESIC):
- Entities acquiring newly issued shares in an Australian early stage innovation company will receive a non-refundable tax offset of 20% of the value of the investment, subject to a maximum offset cap of $200,000.
- Investors can also disregard any capital gains realised on the shares if they have been held for between one and ten years.
The incentives are designed to connect start-up companies with investors that have both the capital and business experience to help develop successful innovative companies, particularly at the pre-commercialisation phase – where a concept is in development but the company needs additional funds to commercialise.
The amendments are designed to apply to a broad range of potential investors who are either investing directly or through a company, trust or partnership. As investments in innovation companies are often high risk, the amendments limit the risk exposure of investors to $50,000 per year. The rules are more relaxed for sophisticated investors.
In general, an ESIC qualifies if it is:
- At an early stage of its development; and
- Developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return.
The initiatives also extend to early stage venture capital partnerships now offering
- Non-refundable carry-forward tax offsets, and
- Maximum capital increase from $100m to $200m
There are other funding options which offer tax incentives – Research & Development; Employee share schemes; and Crowdfunding.
Please contact our office to discuss further if you have any questions.