Tax Laws Amendment (Tax Incentives for Innovation) Act 2016 (54 of 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.

(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.