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There’s been much talk around innovation since Prime Minister Malcolm Turnbull launched the government’s innovation statement in December 2015 with many a tax break, concession, and relaxation announced.
This article will focus on the Early Stage Investor Tax Offset that has been effective for new share investments made from 1 July 2016 after the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 received Royal Assent on the 5th of May 2016.
Like all good tax concessions, the devil is in the detail and while this is a great measure that is sure to encourage much needed investment in our local start-ups, both investors and start-ups alike must be sure to apply the tests correctly.
What is the Early Stage Investor Tax Offset?
Broadly, from 1 July 2016, if you invest in a qualifying early stage innovation company (ESIC) via the acquisition of new shares you (the investor) will be eligible for:
Maximum cap for the offset:
TRAP! Nasty trap for investors who exceed their cap and are not considered a sophisticated investor:
So what is an ESIC?
For a company to be considered an ESIC, there are two tests that must be passed. Firstly, the company must pass the “early stage test”. Then, in addition, either the “100 point innovation test” or “principles-based innovation test” must be passed.
Early Stage Test – Four requirements must be met:
100-point innovation test requirements – the company must obtain at least 100 points by meeting certain objective innovation criteria as outlined in the ATO’s “100-point innovation test table”.
Easy? And we pass without having to look at the final test? Hopefully! The principles-based innovation test is arguably far more subjective and therefore naturally a higher risk of getting it wrong. In practice, if a company undertakes activities that meet the 100-point innovation test, this is likely to be the simplest way to determine its eligibility, when compared to the principles-based innovation test.
Principles-based innovation test – Five requirements must be met:
How does an investor qualify?
The investor must have purchased new shares after 1 July 2016 in a company that meets the requirements of an ESIC immediately after said shares have been issued.
Exclusions? The early stage investor tax incentives aren’t available to you if:
Australian resident and non-resident investors are eligible as are investors who may be a trust or partnership.
TRAP! As at time of writing, the ATO’s published information states that they are currently considering how these tax incentives apply to superannuation funds that invest in a qualifying ESIC. Watch this space!
Now that we’re either an eligible ESIC or an investor who’s made an investment in an ESIC, what do we need to do?
By 31 July each year, companies that are an ESIC must report the information for new shares issued in the previous year. The form to report this information is being developed, so all available information pertaining to new shares issues (including investors’ details) should be obtained. If a company is having difficulty assessing whether it qualifies as an ESIC a private ruling could be sought from the ATO.
The investor must determine whether they are eligible for the early stage investor tax incentives, which means that the onus is on the investor to confirm that the company qualifies as an ESIC at the relevant test time. Note, even if an ESIC has obtained a private ruling at an earlier point in time, this is not sufficient to argue the company was an ESIC at a later time. If the investor would like to rely upon a private ruling from the ATO, they would be required to lodge their own application. All tests are applicable immediately after the new shares are issued to the investor. The investor should keep records to support their entitlement to the early stage investor tax incentives.
Although this paper has been kept brief there are many factors to consider with regard to these new measures for investors & start-ups alike, so it is critical to seek professional advice from a qualified expert in the field.
For further discussions or information on this matter please contact Michael Kerwin on 07 3394 2311.
As we put down the credit cards after the plethora of end of financial year sales events, we kick off what we all hope will be a prosperous new financial year. Despite the many uncertainties in global markets and governments, we wanted to take the opportunity to remind you of some important points as we move into the New Year:
Foreign resident capital gains tax withholdings rules apply NOW
Don’t let the name deceive you, as we’ve highlighted in our recent correspondences these new measures do not just apply to “foreign residents” and will apply to a broad range of property transactions over $2M. Online forms are now available on the ATO website for the following:
• Clearance certificate application form
• Variation application form
• Purchaser payment notification
You can find these forms and other useful information from the ATO by clicking here.
Tax Incentives for early stage investors
From today innovative new business start-ups will have easier access to capital, while investors will have access to generous tax offsets for early stage investments. After the bill received Royal Assent on 5 May, the first of July will have certainly been circled on the calendar for many. The Australian Government has a raft of information available here
Extended deadline for SuperStream compliance for small businesses
On the 22nd of June, Deputy Commissioner James O’Halloran announced that small businesses (less than 19 employees) that are not yet SuperStream ready now have until 28 October 2016 to be compliant.
Extended deadline for LRBA arrangements
On 6 April 2016, the ATO issued PCG 2016/5 which outlined the safe harbour terms upon which a trustee of a SMSF could choose to structure their Limited Recourse Borrowing Arrangement (LRBA) with related parties in order to show that it is consistent with an arm’s length dealing. The ATO has extended the original deadline of 30 June 2016 to 31 January 2017.
Real property transfer reporting
A reminder that the ATO are always willing to help! From today, all state and territory collection agencies will be collecting and reporting information to the ATO about all transfers of freehold and leasehold interests in real property located in all states and territories.
New checklist for Research & Development Tax Incentive
The ATO have recently updated their information, including helpful checklists on assessing whether your activities may be eligible for the R & D Tax Incentive. This can be a very generous tax measure assisting many businesses fund the research & development activities undertaken generating new and innovative activities.
Click here for a good source of information available from the ATO.
Should you have any queries, please don’t hesitate to contact our office on 07 3394 2311.
Regards, The Hoffman Kelly Team
The budget was handed down last night, and there were several major announcements. Issues dealt with include:
• Imposing a lifetime limit of $500,000 on non-concessional superannuation contributions
• Reducing the superannuation concessional contribution cap to $25,000
• Capping tax-free super to balance of $1.6 million
• Removing tax-free earnings on TRIS accounts
• Expanding the number of taxpayers with 30% tax on concessional contributions
• Abolition of anti-detriment deductions
• Expanding tax deductibility of contributions to employees and those over 65
• Refunds for low income earners contributing to super
• ‘Catch-up’ concessional contributions limits over 5 years
• Reducing the company tax rate to 25% over 10 years
• ‘Small business entity’ concessions being expanded to larger businesses
• Tax cuts for those earning over $80,000
• New ATO anti-avoidance tax force
There are some pleasing changes and opportunities as a result of the budget, but the restrictions on superannuation will cause major headaches, especially given their retrospectivity. We especially encourage anyone who had plans to contribute to super before 30 June 2016 to reconsider and seek advice as to whether it is still possible to do so or not.
To read the full budget update, please click here to download.
The Hoffman Kelly Team
The Federal Government has introduced legislation (to apply from 1 July 2016) which requires the purchaser of an Australian property to withhold 10% of the purchase price at settlement and pay this amount to the Australian Taxation Office (ATO). Whilst the withholding amount is designed to cover a “foreign resident” vendor’s potential capital gains tax liability, the legislation will apply to all property transactions unless an exception is applied (see below). A foreign resident can be both an individual or a company.
The purchaser’s obligation to withhold the 10% amount will NOT apply where:
(a) The market value of the asset is less than $2m; or
(b) A clearance certificate has been obtained from the ATO by the vendor and provided to the purchaser BEFORE settlement; or
(c) The transaction is conducted through an approved stock exchange; or
(d) The transaction is a securities lending arrangement; or
(e) The amount is already required to be withheld as withholding tax for some other reason; or
(f) The vendor is under external administration or in bankruptcy
It is important to note it is the PURCHASER’S RESPONSIBILITY to withhold and remit the funds. If the purchaser fails to withhold and remit, the purchaser can be subject to a penalty equal to the CGT amount which should have been withheld.
The Hoffman Kelly Team
Should you have any queries, please don’t hesitate to contact our office on 07 3394 2311.
Accessing the federal government’s research and development tax incentives is often considered or assumed to be too complicated by many small to medium business owners. However the benefits can be well worth the effort, particularly given that the tax credit can be in the form of a cash rebate where a resulting tax loss occurs.
In recent times some of our clients have had great success accessing their R&D entitlements by engaging experts to review their entitlements and assist with the preparation of the necessary documentation. That is, someone else has come in and done all the hard work for them which resulted in either a reduction in tax payable or a tax refund.
If eligible for the R&D Incentive, Companies will receive a Tax Offset based upon their turnover as follows:
• For Companies with Group Turnover Less Than $20M: 45% Refundable Offset (equal to a $0.15 tax saving for every dollar of eligible R&D expenditure)
• For Companies with Group Turnover Exceeding $20M: 40% Non-Refundable Offset (equal to a $0.10 tax saving for every dollar of eligible R&D expenditure)
Companies in a tax loss position that qualify for the Refundable Offset are also able to receive a cash refund of $0.45 for every dollar of eligible R&D Expenditure to the extent of the company’s tax loss amount.
Companies who submitted their 2012 claims near last year’s deadline should be aware of changes to the registration application introduced in October 2013. This includes the additional requirement for:
• Details of the new knowledge intended to be produced by the core activities and how this is different from current knowledge in the relevant field;
• Details of how the outcome of the registered core activities could not have been known in advance based on current knowledge, information or experience;
• Details of how each core activity can be shown as an experiment including a statement on the relevant hypothesis, experiment, observation and conclusion;
• Details of how supporting activities contribute to a corresponding core activity.
If you would like to review the eligibility requirements further, please refer to the attached document prepared by us…..but you must act very quickly if claiming for the 2013 financial year!
Companies are still able to claim their Eligible R&D Expenditure for the 2013 Year by registering with AusIndustry by the April 30, 2014 Lodgement Deadline. Please call us for further information or assistance
In July 2012, changes were made to the Directors Penalty Notice regime, which have increased the liability of Companies and personal exposure of their directors. These changes were introduced to ensure that Companies are compliant with the reporting and remittance of their PAYG and Superannuation obligations. The ATO signalled that it is no longer prepared to support struggling businesses through financing business operations via unpaid tax and superannuation obligations. In recent months, there has been an increase in activity by the ATO against organisations who are behind in the lodgement of their business activity statements and returns. This recent crackdown means that many Companies and their directors face the possibility of prosecution or fines if they do not comply to their statutory obligations.
If a company is late in lodging their returns or activity statements, they will incur penalties and be charged a daily interest rate on any unpaid amounts.
Once a Company has received an ATO compliance notice and still fail to lodge its returns, the company could face the following repercussions:
• An audit and face further investigation from the ATO
• The ATO may estimate their net assessable amount or taxable income, and the tax they owe without further warning
• A business or individual could be referred for prosecution without further warning
• If prosecuted and convicted, an individual could be fined up to $8,500 or imprisoned for up to 12 months, for a company, the maximum fine is $42,500.
• Ensure any outstanding BAS and PAYG returns are lodged as soon as possible
• Pay all PAYG and superannuation charge amounts within the relevant time frames
• Keep all BAS and PAYG returns up to date and lodged within 3 months of the due date.
If a BAS return is lodged but PAYG is not paid, the ATO is required to issue a Director Penalty Notice. At the expiry of the 21 day notice period, personal liability can apply. Directors’ personal liability for a company’s unpaid PAYG will be avoided if a company enters into Voluntary Administration, or has a Liquidator appointed before the expiry of the Director Penalty Notice. If unpaid PAYG is not reported within 3 months of the due date, the Director will automatically be personally liable for any unpaid amounts, even if the company is placed into voluntary administration or liquidation after this date.
If you have any overdue BAS and/or PAYG returns and/or PAYG and Superannuation charge payments, please contact our office on 07 3394 2311 for advice and options available to deal with issues arising from this legislation.
*The daily interest rate is subject to changes based upon current interest rate variations.
With a new government there are bound to be changes to tax legislation. Some of the coalition’s stated policies which may come into effect are:
Some of the changes will have favourable tax consequences and some negative for businesses and superannuation funds. As so many rules have changed over the last few years, we recommend discussing major business decisions with our team before entering into transactions in order to ensure the tax consequences are understood.