Turnbull’s innovation tax incentive package inches forward, how to access grants, and the AAT clarifies R&D.
The Turnbull innovation
Key elements of the Turnbull innovation package in Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 received Royal Assent on 5 May, 2016 and are now law. These changes focus on promoting investment in early stage innovation entities. The changes provide for:
- A 20% carry-forward non-refundable tax offset on investments capped at $200,000 per year, and a 10-year exemption on capital gains tax for investments held in the form of shares in the innovation company for at least 12 months, so long as the share stake is limited to a 30% or lesser interest in the innovation company. The tax offset is available upon investment. Any sale of the shares will be taxed as on capital account
- New arrangements to venture capital limited partnerships (VCLP) and early stage venture capital limited partnerships (ESCVLP). including a non-refundable tax offset of 10% of the value of new capital invested into ESCVLP during the income year; an increase in the maximum fund size of ESCVLP from $100 million to $200 million; improved access to funding from managed investment trusts; and broadened and simplified rules for both VCLP and ESCVLP’s.
The definition of innovation company is limited by revenue, expenditure, and innovation potential. there are plenty of rules but probably a step in the right direction.
Securing Grant funding
The feminist icon, Gloria Steinem, once said “Planning ahead is a measure of class. The rich and even the middle class plan for generations, but the poor can plan ahead only a few weeks or days.”
It’s the same with grants. Those businesses that secure grants, plan to secure them especially as they enter late stage R&D or commercialisation when demand for cash tends to outstrip internal resources.
Grants come in two types: evergreen grants are always open, whereas pop-up grants open and close fast, like any pop-up outlet. Most grants target proof of concept prototyping or commercialisation funding or collaboration between industry – university / other research organisations. Most need some sort of dollar matching investment.
The key is planning your cash flow needs well ahead of time – having a strategy to fund your product to market. Give yourself time to find the right grant or other funding you need to accelerate, not delay, getting to market.
AAT decision on R&D “purpose”
A recent AAT decision, JLSP v Innovation Australia  AATA 23 , confirmed an important principle about the R&D tax incentive.
To be classed as R&D, an activity must be done with the purpose to generate new knowledge, something beyond the application of existing expertise or experience. This purpose doesn’t have to be the sole, dominant or even a major purpose for conducting that activity. It can be subservient to a commercial purpose provided that it is not an inconsequential purpose.
It is good practice to document the purpose of your R&D activity in the business context in which it is conducted and to state the new knowledge you hope to derive. This helps you see your investment in R&D as a strategic asset of your business, something that can be he 10x factor driving your success.