Australian budget enhances incentives for early-stage investors

The 2016-2017 budget includes an amendment to existing tax incentives for angel investors, whereby the minimum holding period in order to qualify for a 10-year capital gains tax exemption has been reduced from three years to 12 months. At the same time, certain criteria have been tightened to ensure that target companies are both young and innovative; that there is no existing affiliation between investors and target companies; and that non-sophisticated investors do not overexpose themselves to the asset class in order to get the tax exemption.

These measures follow a policy set out in the government's National Innovation & Science Agenda last December allowing early-stage investors to claim a 20% non-refundable tax offset based on the amount committed to a start-up or a VC fund, capped at A$200,000 ($150,000) per investor, per year.

Other measures are specific to early stage and venture capital limited partnerships (ES/VCLP) structures, which also benefited from the innovation agenda. The increase in the maximum fund size for new ES/VCLPs of A$100 million to A$200 million now applies to existing partnerships as well. Steps will also be taken to ensure that VC tax concessions are available for financial technology, banking and insurance-related activities.

These moves are generally intended to make it easier to raise and deploy capital for ES/VCLPs. The innovation agenda has already further opened up the structure to foreign fund-of-funds and trust companies, and removed a requirement that ES/VCLPs divest portfolio companies once assets exceed A$250 million.

The Australian Private Equity & Venture Capital Association (AVCAL) lobbied the government ahead of the budget not to extent the A$200 maximum fund size to existing ES/VCLPs but also make these vehicles subject to the 10% tax offset already applicable to new ES/VCLPs. Another concern is the lack of transparency on capital gains treatment for high net worth investors in ES/VCLPS.

In addition, AVCAL called for transitional arrangements relating to the removal of the A$250 million divestment threshold and for amendments to employee shares schemes (ESS). There has already been some ESS reform, with the removal of upfront tax liability. But AVCAL would like to see a removal of both the requirement that start-ups disclose audited financial statements and the minimum three-year holding period within which employees cannot sell shares without incurring significant tax liability.

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• Topics
• Australasia
• Regulation
• Venture
• Early-stage
• Australia
• Technology