The Federal Budget 2021-22, handed down by Josh Frydenberg on Tuesday, May
11, delivered no big-impact outcomes for capital markets. Yet, the
combination of smaller, new, extended and expanded initiatives aimed at
providing more favourable conditions for entrepreneurs and early-stage
businesses - particularly in technology sectors - is a step in the right
direction in supporting Australia’s competitiveness and innovation to drive
lasting change.
Front and centre in the Budget were several tax incentives that will help
retain key talent and leave jobs onshore, including the new Patent Box
Regime and the amended Employee Share Scheme rules. Other measures
affecting capital markets were aimed at making it more attractive in doing
business in Australia, including; the announcement of the introduction of
Corporate Collective Investment Vehicles; the self-assessment for effective
lives for intangible assets and a review on VC tax concessions.
While the Federal Budget papers were light on detail, over the coming
months we expect clearer guidance. In this article, we review BDO’s
response to these measures and what businesses and investors can expect.
For further detail on these changes, visit
BDO’s dedicated Federal Budget pages.
Patent Box – The missing link in Australia’s incentive regime.
A surprise incentive and welcome addition to the Federal Budget papers was
the Patent Box regime, which has been on the Government’s radar since the
end of 2019.
Fundamentally, the Patent Box will offer tax breaks on income made from
Australian medical and biotechnology inventions. This will lead to
companies keeping and commercialising the Intellectual Property (IP) in
Australia – retaining both innovation and jobs onshore. This has been a
pain point for many successful start-ups and highly skilled talent in the
past, because Australia’s current policy does not provide an incentive to
support the commercialisation of a product.
This tax concession will apply from 1 July 2022 and includes taxing income
derived by a company directly from Australian-owned and generated patents
at a corporate tax rate of 17%.
This change will see a decrease in the current corporate tax rate of 13%
for large businesses and 8% for small to medium enterprises. Income from
manufacturing, branding, and other attributes will still be taxed at up to
30%. We note, however, that the details of the regime are yet to be
finalised pending consultation with industry experts.
This is a welcome measure and in BDO’s view, its introduction is the
missing link in Australia’s incentive regime. Overall, The Patent Box
Regime acts as an incentive for the international commercialisation of
Australian developed technology, leading to numerous flow-on benefits,
including further investment and development activities. However, limiting
the regime to medical, biotechnology, and potentially clean energy
innovations is not in line with similar regimes in other jurisdictions
which are rightfully industry agnostic.
This focused strategy approach has been seen across a number of the
Government’s initiatives over the past few years – such as Manufacturing
Strategy, which focuses on 6 key sectors; and the Consumer Data Right (CDR)
- focused for now, on Financial Services. It’s hoped that once these
initiatives gain momentum, we see them spread across a wider remit of
sectors.
At this stage, medical and biotech companies will need to wait for the
detail to see if they qualify, however we can look towards European
countries such as the UK, where Patent Boxes have been part of their tax
systems for many years. In the UK, while successful, it has been met with
criticism with changes at various stages made along the way. In 2016,
revised criteria were released after the OECD called out the regime for
possible abusive tax avoidance practices from multinational companies. It’s
expected that Australia’s criteria will build on the learnings of their
European counterparts while ensuring that administrative burdens for
start-ups and early-stage businesses are addressed.
As part of Australia’s overall incentive scheme, the Board of Taxation has
also announced that they will conduct a review of the administrative
framework of the wider research and development tax incentive by the end of
this year.
Other measures aimed at attracting talent onshore include the Global Talent
Scheme -
you can read more about it here.
Employee Share Schemes – A missed opportunity
Employee Share Schemes were tabled for change, however, disappointingly the
changes do not address deficiencies in the current scheme. An overhaul of
the scheme would have been well-received and made a larger impact -
especially for early-stage businesses who often find it hard to retain good
talent.
Changes announced to the Employee Share Scheme included, the ‘Cessation of
employment,’ no longer being a taxing point, with this change only applying
to ESS interests issued to employees in the income years commencing after
the amending legislation is passed.
While BDO welcomes this change, it remains to be seen as to when, if ever,
these deficiencies will be addressed by the Government. In BDO’s response
to the Federal Budget Report, we address two recommendations that could
enhance ESS, including:
- Where the exercise of an option creates a taxing event (which it often
does), employees can be forced to sell shares to fund the resulting
taxation liability. A taxation liability should not arise until a
share/interest is ultimately disposed of (i.e. cashed out).
- In certain circumstances where an option is exercised, the share must be
held for 12 months to qualify for the 50% capital gains tax discount. The
12 month period should run from the time the option was granted.
Corporate Collective Investment Vehicles – Are we there yet?
The Government has announced they will finalise the Corporate Collective
Investment Vehicles (CCIVs) with a revised commencement date of 1 July
2022. This investment vehicle will enhance the international
competitiveness of the Australian managed funds industry by allowing fund
managers to offer investment products using vehicles more familiar to
overseas investors. This measure has been on the drawing board since being
announced at the 2016-17 Budget, and Treasury has already consulted on the
draft legislation for CCIVs in three tranches. After almost five years in
the making, professional fund managers will be relieved to see this measure
finally being introduced. We trust that this measure can now be introduced
quickly to allow Australia to reap the benefits of managing more funds from
overseas investors. Once the legislation is enacted, CCVIs will be able to
be registered.
Realising the true value of an intangible asset
Self-assessed effective lives for intangible assets was another
long-awaited announcement that has been on the drawing board since 2016.
This is good news, as some industries face technological advances that are
rapidly replacing products, well before some of the lengthy effective lives
currently hardwired in the legislation. This is a welcome amendment to the
law as it would accelerate the requisite tax deduction.
Currently, the effective lives for intangible depreciating assets such as
patents, registered designs, copyrights and in-house software are
prescribed in the tax legislation. Unlike tangible depreciating assets,
taxpayers do not currently have the option of self-assessing the effective
life of intangibles and thereby increasing their annual depreciation
deductions.
This measure allows taxpayers to self-assess the effective lives of
eligible intangibles giving businesses a greater ability to align the tax
treatment with the actual economic benefits provided from the asset. The
new rules will apply from 1 July 2023 (after the temporary full expensing
measures cease).
Future focused Venture Capital Concessions
Lastly, ahead of the budget, the Federal Government announced they would
review Venture Capital Tax concessions – including the Venture Capital
Limited Partnership and Early-Stage Venture Capital Limited Partnership
regimes. This was announced in the lead-up to the budget as part of the new
Digital Economy Strategy. At this stage, public consultation will be
undertaken in 2021. Given the fact that Australia’s VC market is heavily
supported by the incentives that attract foreign investment and Venture
Capitalists to invest in early-stage start-ups, this is a much-needed
review. It’s expected this review will factor changes in the contemporary
environment and produce valuable outcomes, where tax arrangements in
Australia will enable early-stage Australian start-ups to thrive.
Overall, while there were no big bang measures for capital markets, it’s
great to see the modernising of the system to take into account a rapidly
changing and globally competitive environment. If you would like any more
information about how the Federal Budget affects you, please get in touch
with our
Private Equity/Venture Services team.