The government recognises this, with the constant lobbying and noise from start up groups, as well as the increased growth of company establishments in the past few years. As part of the recent budget, the proposed tax incentives for investors was formalised, and whilst still to received the royal OK, it is pretty much "in the bag". And what a great incentive it is!

So what is happening?

The good news:

Concessional tax treatments will be made available for investors who support innovative startups, including:

- A 20 per cent non-refundable carry-forward tax offset on investment capped at $200,000 per investor, per year.

- A 10 year capital gains tax exemption for investments held for three years.

Investor: Who can invest, and qualify for the tax incentives?

1) The investor must invest in a qualifying start up (or ESIC - Early Stage Innovation Company);

2) The investor must not be a widely-held company; and

3) The investor is either:

·       a legal person controlled by an individual considered a sophisticated investor pursuant to subsection 708(8) of theCorporations Act 2001; or

·       a non-sophisticated investor that has invested $50,000 or less in the income year.

The Startup: Who will qualify for investors to invest in?

The incentive will be available for investments in companies that:

- undertake an eligible business (scope to be determined)

- that were incorporated during the last three income years (or before that, but received an ABN only in the last 3 years)

- are not listed on any stock exchange

- have expenditure of less than $1 million and income of less than $200,000 in the previous income year respectively.

The key question - What is an eligible business???

Companies that will qualify will be one that is involved in innovation, by either

- satisfying the principles-based test through self-assessment (Option 1); or

- satisfying the gateway test through self-assessment (Option 2); or

- receiving a determination from the Australian Taxation Office (last resort!)

Option 1 - Principles-based test:  

The company will be an considered an ESIC (or a "start up"), through self‑assessment of whether:

·       it is genuinely focused on developing for commercialisation one or more new, or significantly improved, products, processes, services or marketing or organisational methods;

·       the business relating to those products, processes, services or methods has a high growth potential;

·       it can demonstrate that it has the potential to be able to successfully scale that business;

·       It can demonstrate that it has the potential to address a broader than local market, including into global markets, through that business; and

·       it can demonstrate that it has the potential to be able to have competitive advantages for that business.

Option 2 - Gateway test – must achieve at least 100 points:

The gateway test contains a more objective set of tests to provide additional assistance to identify an early stage innovation company. If a total of 100 points is achieved, the company will be considered an eligible innovation company for the purposes of this measure.

 Points will be given for a range of activities including: a company’s level of expenditure on research and development; whether the company has received an Accelerating Commercialisation grant; whether the company is undertaking/completed a genuine accelerator program that supports entrepreneurs; received at least $50,000 from a third-party financial investor; is an applicant on one or more enforceable intellectual property rights on an innovation through a standard or innovation patent; or has a written agreement with a listed/registered entity under the Higher Education Funding Act 1988 or the Industry Research and Development Act 1986.

When is it happening?

The scheme is expected to commence from 1 July 2016 as soon as amendments receive Royal Assent.

Once the legislation receives Royal Assent, the measures will apply from the 2016-17 income year. 

So as a message to start up businesses out there – now is the time to get savvy and start to plan for investors into your business, to give it the cash flow it needs to launch or to continue growing. This is a huge incentive for investors. It enables them to get into “risky” start ups, and also receiving tax benefits at the same time, so it is a great selling point.