Using taxation to encourage innovation: the Australian experiments

Graw, Stephen (2019) Using taxation to encourage innovation: the Australian experiments. In: [Presnted at the Tax Research Network 28th Annual Conference]. From: Tax Research Network 28th Annual Conference, 9-11 September 2019, Preston, UK.

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Abstract

In addition to measures such as development grants and funding for incubator programs Australia has long used tax incentives to encourage and reward innovation. Like many other countries it has traditionally offered standard tax breaks, such as write-offs for expenditure on R&D and accelerated depreciation for capital expenditure but the 21st century has been noteworthy for the range and scope of tax incentives (and other measures) that both state and Federal governments have introduced to assist innovating enterprises, especially in their start-up phase.

Those incentives, at least at Federal level, really commenced with the Venture Capital Act 2002 (Cth) (and the associated amendments to both the Commonwealth's taxation legislation and the individual state and territory Partnership Acts), to facilitate non-resident investment in the Australian venture capital industry. Taken collectively, those changes introduced tax incentives for investors making 'early venture capital investments' (ECVIs) through specific forms of investment vehicles — Venture Capital Limited Partnerships (VCLPs), Early Stage Venture Capital Limited Partnerships (ESVCLPs) or Australian Venture Capital Funds of Funds (AFOF). The incentives included (and include) both an exemption from Capital Gains Tax on ECVIs that have been held through one of those vehicles — provided the investment has been held for at least 12 months — and an exemption from income tax on any profits made through the vehicle (though losses on both capital and revenue account are also disregarded). Other currently available incentives include the R&D Tax Offset under Div 355 of the Income Tax Assessment Act 1997 (Cth) ('ITAA97'), which replaced the former 'R&D Tax Concession' in 2011. It allows 'eligible R&D entities' that incur ‘eligible R&D expenditure' on defined 'core' or 'supporting' R&D activities to a self-assessed tax offset, the nature and extent of which depends on the size of their turnover and the amount of their eligible expenditure. That offset, which is jointly administered by Ausindustry and the Australian Taxation Office ('ATO') is in lieu of a tax deduction. Div 83A of the ITAA97 also provides a 'start-up' concession for shares and options that eligible small start-up companies might issue their employees — in lieu of the higher salaries that they would otherwise have to pay to attract talent. It, inter alia, allows employees participating in option schemes to defer, more easily, their liability to taxation until the options are exercised and, in particular, without the options having to be at risk of forfeiture — though the scheme rules must still genuinely restrict employees from immediately disposing of the rights they receive.

Item ID: 60902
Item Type: Conference Item (Non-Refereed Research Paper)
Keywords: tax incentives; innovation; R&D; Employee Share Schemes; ESS; ESIC; Crowd-sourced funding; CSF.
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Copyright Information: Copyright to Stephen Graw
Date Deposited: 05 Mar 2020 03:00
FoR Codes: 18 LAW AND LEGAL STUDIES > 1801 Law > 180125 Taxation Law @ 100%
SEO Codes: 94 LAW, POLITICS AND COMMUNITY SERVICES > 9499 Other Law, Politics and Community Services > 949999 Law, Politics and Community Services not elsewhere classified @ 100%
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