Heading into the new financial year, and following on from the announcement of last year’s $1.1 billion innovation statement, there are a number of changes to be aware of if you’re an Australian startup. Remco Marcelis from startup focused accounting firm, Standard Ledger explains.
The biggest changes coming in from 01 July new financial year, that directly affect startups, are ones that will hopefully lead to more investment. It became law in May 2016.
New financial year tax incentives for investors
Effective from 01 July 2016, sophisticated investors in Early Stage Innovation Companies (ESICs) will be eligible for a 20% tax offset. This applies to amounts invested up to $200k per annum. Non-sophisticated investors can also access this limited to a tax offset of $50,000 investment per year.
This means that if a sophisticated angel investor invests $200k in an ESIC they get a $40k tax offset.
To make it even more attractive for investors: They get a 10-year exemption from Capital Gains Tax (if they’ve held the shares for at least 12 months). This means that any gains investors make on the sale of these shares will be tax free.
What is an Early Stage Innovation Company?
An Early Stage Innovation Company (ESIC) is a company that has started in the last 3 years, has expenses of less than $1 million and has assessable income of less than $200k. It is also involved in innovation.
New financial year changes to Early Stage Venture Capital Limited Partnerships (ESVCLPs)
Apart from being an almost unpronounceable acronym, ESVCLP legislation came into effect from 2002. It is now the preferred investment vehicle for the most active VCs in Australia because of the tax incentives built into the ESVCLP laws.
There are a couple of updates of interest that come into effect from 01 July:
- partners in a new ESVCLP will receive a 10% non-refundable tax offset on capital invested. This includes some of the super funds that are increasingly showing their interest in putting funds towards venture capital
- The maximum fund size for new ESVCLPs will be increased from $100 million to $200 million. This means we are starting to see some larger funds in Australia.
This means that there should be more VC funds to invest into startups.
Also new from 1 July: Benefits related to setup and running costs
If you’re thinking about creating another company (or even another startup):
- You can now claim the costs associated with setting up the company including legal advice around structuring, establishment costs (ASIC etc), and putting in place those up-front shareholder, vesting and other legal agreements. See the startup-focused legal team at General Standards for more information.
There are other “small business” changes that are also relevant to startups. One of these includes the fact that from 01 Jul 2016, the company tax rate will be reduced to 27.5% tax on profits, instead of 30%. This applies to companies with less than $10 million revenue.
So, for every $100,000 in profit you keep an extra $2,500.
Continuing benefits for startups to be aware of at this time of year include:
- an immediate asset write off for assets that cost less than $20,000 rather than needing to be written off over a number of years. This was introduced last year but it’s a good reminder that it still applies.
- The Federal Government’s Research and Development (R&D) Tax Offset that allows you to get 45% cash back from the ATO for eligible R&D spend. This remains the single biggest source of funding for startups in Australia. Now is a good time to get your finances sorted and talk to your accountant if you’re wanting to submit a fast tax return after 30 June to access this.
Did you know? If your company is making a loss and you spend $100k on R&D, you can get a cash refund of $45k.
We’re still waiting on some things
These includes the Crowd Sourced Equity Funding proposal and further changes to the Employee Share Scheme.
The Crowd Sourced Equity Funding proposal, aimed at making it easier for even smaller investors to invest in startups, has gotten bogged down. It’s been accused of being unwieldy; the current draft shows that startups need to go through the process of becoming an unlisted public company in order to access the funding.
Further changes to the Employee Share Scheme, which took effect from 01 July 2015, have happened. Now, companies who want to offer an ESS no longer need to lodge documents (destined to become publicly available) with ASIC. This has reduced some of the ESS limitations among startups.
Do you have a burning tax question?
If you’ve got a burning tax question that’s keeping you up late at night towards the end of the financial year, please contact Michael Budnow our tax expert, on 0437 450 912 or firstname.lastname@example.org.
Remco Marcelis is the Managing Partner at Standard Ledger startup accountants