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“Welcome to the ideas boom”

7 December 2015

The government unveils new $1.1 billion innovation plan

The government has announced a four-year $1.1 billion innovation package designed to drive an ideas boom in Australia.

Acknowledging innovation is at the heart of a strong economy, the National Innovation and Science Agenda has put forward a package of initiatives in four key areas:

 Taking the leap - the government is supporting entrepreneurs by opening up new sources of finance, embracing risk taking on innovative ideas, and making more of their public research;

 Working together - the government is increasing collaboration between industry and researchers to find solutions to real world problems and to create jobs and growth;

 Best and brightest - the government is developing and attracting world-class talent for the jobs of the future; and

 Leading by example - the government will seek to lead by example by embracing innovation and agility in the way they conduct business.

The measures in the National Innovation and Science Agenda aim to put Australia on the right track to becoming a leading innovator; open to adapting and evolving to improve the wellbeing and quality of life for all Australians.

These measures build upon existing initiatives targeted at innovation and entrepreneurial activity, including the Entrepreneurs’ Programme, the Small Business and Jobs Package, Industry Growth Centres, the R&D Tax Incentive, Cooperative Research Centres and many more.

The focus of this Alert is on the tax changes impacting on business, while making broad reference to other elements of the innovation plan.

1. TAKING THE LEAP

Too often businesses cannot access finance, or fear of failure gets in the way of translating their great ideas to commercial realities. The government will seek to change Australia’s fear of failure culture and help businesses find capital which is critical for the digital economy.

Increasing access to company losses

The government plans to put in place upcoming reforms that will help businesses take sensible risks and ultimately encourage investment and growth in Australia’s innovative businesses.

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2 To help businesses innovate and grow without fear of losing out, the government is planning to be more flexible in relation to access to company losses:

 The current ‘same business test’ will be relaxed to allow businesses to access prior year losses when they make minor changes to their operations. This will encourage entrepreneurship by allowing loss-making companies to seek out new opportunities to return to profitability;

 As part of these reforms the ‘same business test’ will be replaced by a new and more flexible ‘predominantly similar business test’; and

 Under the ‘predominantly similar business test’ companies will be able to enter into new business activities and transactions without facing a tax penalty.

The ‘predominantly similar business test’ will apply to losses made in the current and future income years; current tests will continue to apply to existing losses.

Intangible asset depreciation

Innovative companies are more likely to have many intangible or knowledge-based assets (such as patents, trademarks, copyrights and business models). Unlike tangible assets, however, acquired intangible assets with a statutory effective life cannot be self-assessed to bring their tax life in line with their economic life. This can reduce the depreciation benefit and increase the cost of investment in these assets; discouraging investors. Changing the tax treatment for acquired intangible assets will remove this deterrent and help innovative companies to market their intellectual property and other intangible assets.

This initiative provides businesses with:

 A new option to self-assess the tax effective life of acquired intangible assets. This will better align the tax effective life with the true life of the assets, meaning the same tax treatment will be available for acquired intangible assets as is available for other types of assets; and

 The option to continue using the existing statutory effective life of the asset.

Faster depreciation will decrease the costs of investment in these assets, allowing companies to better exploit and commercialise them.

The changes will apply to assets acquired from 1 July 2016.

Changes to Venture Capital Limited Partnerships

Venture Capital Limited Partnerships (VCLPs) are world-class investment vehicles that provide tax exemptions for those investing in innovative companies at the early and growth stages of a start-up.

At these stages of development, most companies have received one or more rounds of initial funding but don’t yet have the scale or track-record needed to go public or attract buy-in from institutional investors.

Reforming VCLPs will make them more internationally competitive and will attract greater levels of venture capital investment.

Under the new arrangements:

 Partners in a new Early Stage Venture Capital Limited Partnership (ESVCLP) will receive a 10 per cent non-refundable tax offset on capital invested in start-up companies;

 The maximum fund size for new ESVCLPs will be increased from $100 million to $200 million; and  ESVCLPs will no longer need to divest from a company when its value exceeds $250 million.

Changes to both the VCLP and ESVCLP will relax eligibility and investment requirements to allow managers to undertake a broader range of investment activities and greater diversity of investors.

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3 The new arrangements will take effect from 1 July 2016 as soon as the enabling legislation may be passed into law.

Reforms to Employee Share Schemes

Employee Share Schemes (ESS) give employees shares or rights to acquire shares in the company as part of their remuneration. As this invests the employee’s interests in the success of the company, it not only attracts the best and brightest but means that start-ups can provide the promise of a greater remuneration down the track.

The new reforms will:

 Limit the requirement for disclosure documents given to employees under an ESS to be made available to the public. This will allow otherwise non-disclosing companies to offer shares to their employees without having to reveal commercially sensitive information to competitors; and

 Make ESS more user-friendly for innovative companies, allowing them to attract motivated staff without a substantial initial outlay.

New ESS legislation is expected to be introduced in the first half of 2016.

Certain improvements in the ESS rules, particularly in respect of rights and the introduction of small start-up concessions have already been operative from 1 July 2015 - refer to our ESS tax alert here.

Tax incentives for investors

The period between the initial funding and when a start-up begins generating revenue can be a challenging time. The government is making some changes to the tax system to incentivise investors to direct their funds towards high-growth, innovative start-ups.

The measures include concessional tax treatments for investors who support innovative start-ups, including:  A 20 per cent non-refundable tax offset based on the amount of their investment capped at $200,000

per investor, per year; and

 A 10 year capital gains tax exemption for investments held for three years. The measures will target companies:

 That have incorporated during the last three income years;  Are not listed on any stock exchange; and

 Have expenditure less than $1 million and income less than $200,000 in the previous income year. The scheme is based on the successful UK Seed Enterprise Investment Scheme which raised over AUD$500 million in start-up investment for almost 2,900 companies in its first two years.

The scheme is expected to begin during 2016 as soon as the enabling legislation may be passed into law.

Non-tax proposals in “Taking the leap” Insolvency laws reform

The government will be striving to seek a better balance between encouraging entrepreneurship and protecting creditors by:

 reducing the current default bankruptcy period from three years to one year;

 introducing a ‘safe harbour’ to protect directors from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company; and

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4  making ‘ipso facto’ clauses, which allow contracts to be terminated solely due to an insolvency event

and often lead to a company’s liquidation, unenforceable if a company is undertaking a restructure. A proposal paper will be released in 2016. Legislation is expected to pass in mid-2017.

Other proposals

Other proposals included are:

 Access to crowd-sourced equity funding;

o The government will introduce laws to provide access to crowd-sourced equity funding in Australia to provide a diverse range of funding options for businesses and will remove the competitive disadvantage compared to their international counterparts. This will be available to available to Australian public companies with a turnover and gross assets of less than $5 million and individuals seeking to invest using the crowd-sourced equity funding platform will be limited to a maximum amount of $10,000 per company, per year.

 Biomedical Translation Fund;

o The government will establish a new $250 million fund—the Biomedical Translation Fund— which will invest in promising biomedical innovation and commercialisation.

 CSIRO Innovation Fund; and

o The new CSIRO Innovation Fund will support the early stage commercialisation of innovations from CSIRO, universities and other publicly funded research bodies.

 Incubator Support Programme.

o To support existing incubators and to encourage development of new ones, particularly in regions and sectors of high innovation potential, the government will be adding a new component to the Entrepreneurs’ Programme—an $8 million Incubator Support Programme.

2. WORKING TOGETHER

The government will be changing research funding incentives to support partnerships with industry, and will invest in critical, world-leading research infrastructure to ensure researchers have access to the very best. Proposals in “Working together” are:

 Advancing quantum computing technology;

o The government will be investing $26 million over five years to support the development of silicon quantum computing technology in Australia by the Centre for Quantum Computation and Communications Technology (CQC2T), headquartered at the University of New South Wales. CQC2T is a global leader in silicon-based quantum computing research, and the investment in its work will help fund the development of a silicon quantum integrated circuit— the first step in developing a practical quantum computing system.

 Cyber Security Growth Centre;

o The government will be providing $30 million through to 2019-20 to establish a new industry-led Cyber Security Growth Centre to grow and strengthen Australia’s cyber security industry. A Cyber Security Growth Centre will ensure that Australia is a global industry leader, able to export products and services in the global marketplace while helping Australian businesses and governments to address the growing threat of cyber-crime.

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5  Global Innovation Strategy;

o To help Australia compete on an international level, the government will be investing $36 million over five years in a Global Innovation Strategy to improve Australia’s international innovation and science collaboration.

 Innovation Connections;

o To connect more small and medium businesses with researchers, the government will be investing $18 million in a component of the Entrepreneurs’ Programme, for a new Innovation Connections programme. The Innovation Connections initiative will expand and refocus the existing Research Connections programme to drive new industry-led collaborations between researchers and small and medium enterprises. The partnerships will foster the development of new ideas with commercial potential and will identify the knowledge gaps preventing business growth.

 Innovation in agriculture and regional areas;

o The Global Innovation Strategy will provide seed funding for collaborative science workshops with regional economies on shared challenges, such as food and bio security, and will support Australian business and research consortia to work with their international counterparts.

o The Incubator Support Programme will focus on regions and sectors with high innovation potential such as those identified in a Science and Research Priority.

o Sharpening incentives for university engagement with research end users will ensure their efforts have tangible benefits for the agricultural sector.

o Further funding for regional universities will create more opportunities for Australian regions.  Linkage Projects scheme;

o Under the current annual selection for Australian Research Council (ARC) Linkage Projects grants, the partners can wait up to nine months from application to announcement of funding outcomes. Shifting to continuous rounds will allow both researchers and industry partners to take greater advantage of opportunities for collaboration faster and will encourage more partnerships between universities and business.

 Maintaining world class research infrastructure;

o The government will provide long-term funding certainty for cutting-edge, national research infrastructure to ensure research jobs stay in Australia and Australia retains its world class science and research capability. This will enable continued high-level capability in areas such as nanofabrication, food production, health, cyber security and sustainable cities.

 Measuring impact and engagement of university research; and

o In 2015-16 the government invested approximately $3.5 billion in university research. Assessing and reporting on how government investments in university research translate to tangible benefits for Australia will help show where collaboration with industry and other partners could bolster and more quickly deliver these benefits.

 New research funding arrangements for universities

o For the first time, the government will be introducing new research funding arrangements for universities that give equal emphasis to success in industry and other end-user engagement as it does to research quality.

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3. BEST AND BRIGHTEST

The government will seek to create an environment that attracts the world’s best and brightest, while making sure Australians are equipped with the skills they need to thrive in a rapidly evolving workforce.

Supporting innovation through visas

To attract the best and brightest entrepreneurial talent and skills to Australia, the visa system will be improved. The government will be enhancing the current visa system through:

 A new provisional Entrepreneur Visa for entrepreneurs with innovative ideas and financial backing, and a pathway to permanent residence; and

 Pathways to permanent residence for postgraduate research graduates with STEM qualification will be enhanced.

The Entrepreneur Visa will be introduced in November 2016 and the enhanced permanent visa pathway for STEM postgraduate research graduates will be implemented in December 2016.

Other proposals in “Best and brightest”

Other proposals included are:  Embracing the digital age;

o Leveraging off the Australian Curriculum: Digital Technologies, this initiative will ensure both students and teachers have access to the tools they need to enhance their digital literacy to form a workforce skilled to meet Australia’s innovation agenda.

 Inspiring a nation of scientists; and

o The government will support science, technology, engineering and mathematics (STEM) education and community engagement in order to help children, families and the whole community engage in science, to understand the importance of science and the part they can play in Australia’s future.

 Opportunities for women in STEM.

o The government will help encourage greater gender equity in STEM organisations and STEM-based industries.

4. LEADING BY EXAMPLE

The government will seek to become more innovative in delivering services, sharing data and making it easier for business to trade and work with government.

Proposals included are:

 Business Research and Innovation Initiative;

o The government will be encouraging businesses to develop more innovative solutions to important government policy and service delivery problems, with a pilot series of ‘challenges’ called the Business Research and Innovation Initiative. Entrepreneurs will receive funding to create new products and innovations with export potential, while retaining their intellectual property and the right to commercialise the ideas in Australia or overseas.

 Data sharing for innovation;

o The government will be releasing more non-sensitive public data for private sector innovation, and we’ll use the data to improve service delivery and to inform and evaluate policy.

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7  Data61: Australia’s digital and data innovation group;

o The government will be pushing technical boundaries to develop and apply cutting-edge technology. An investment of $75 million will be made in the Commonwealth Scientific and Industrial Organisation’s (CSIRO’s) new research unit Data61, Australia’s largest data innovation group.

 Digital Marketplace; and

o Based on a successful UK model, the Digital Marketplace will be an online directory of digital and technological services provided by small to medium businesses, for government agencies to seek procurement.

 Innovation and Science Australia.

o Innovation and Science Australia (ISA) will replace and redefine the current function of Innovation Australia. It will be the new independent body responsible for advising government on all science, research and innovation matters.

We can assist you

We can assist you with the implications of the tax proposals, potential new fund-raising opportunities and structuring issues as the details unfold.

We also have a team dedicated to migration which will be able to assist with the proposed visa changes. Our commercial and intellectual property lawyers are able to help negotiate and document commercial contracts, collaborative arrangements and intellectual property protection and licensing.

Level 11, 360 Elizabeth Street Melbourne Victoria 3000 T +61 3 9321 7888 F +61 3 9321 7900 W www.rigbycooke.com.au ©2015 Rigby Cooke Lawyers Disclaimer

This publication contains comments of a general nature only and is provided as an information service. It is not intended to be relied upon as, nor is it a substitute for specific professional advice. No responsibility can be accepted by Rigby Cooke Lawyers or the authors for loss occasioned to any person doing anything as a result of any material in this publication. Liability limited by a scheme approved under Professional Standards Legislation. Ross Higgins Partner T +61 3 9321 7830 rhiggins@rigbycooke.com.au Ron Jorgensen Partner T +61 3 9321 7824 rjorgensen@rigbycooke.com.au

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