Tax incentives for entrepreneurs

Entrepreneurs are key drivers of innovation and progress.

Our future economic growth depends, in no small part, on people being prepared to back both their own ideas and those of others, to bring new products and services to market.

To encourage business owners, employees and arms-length investors to embrace the risk that is inherently a part of any entrepreneurial activity, the Australian Government offers a range of tax incentives specifically aimed at boosting investment in new ideas.

Here is an overview of tax incentives for entrepreneurs:

Early stage investors

New companies pursuing new ideas need capital.

Investors in early stage innovation companies (ESICs) are eligible for two significant incentives:

• An upfront incentive of a non-refundable carry forward tax offset equal to 20% of the amount paid for their shares in the company, and
• An exemption from capital gains tax (CGT) on the sale of shares that are held for between 12 months and ten years.

Limits apply, and sophisticated investors are able to claim a larger offset than those who don’t pass the sophisticated investor test.

Employee share schemes

It’s a common practice for companies to issue shares or share options to their workers under an employee share scheme (ESS).

It helps to align employee interests with those of the business.

Tax on shares acquired under an ESS is complex, but for well-established companies the effective result is that any gain made on the shares is taxed as ordinary income.

However, where the company offering the ESS qualifies for the start-up concession the shares may qualify for the 50% CGT discount.

This provides a better outcome than if the company is beyond the start-up phase.

Naturally, rules and limits apply to both the ESS and to the company itself.

R&D tax incentive

To encourage research and development, companies can claim tax offsets for eligible R&D activities.

For entities with an aggregated turnover of less than $20 million, the offset has the bonus of being refundable.

The R&D tax offset is self-assessed, and as a specialist area of taxation it’s highly advisable to obtain qualified advice from practitioners who are experienced in this area.

Get the right business advice

Accessing these tax incentives depends on having the right business structure in place.

While trusts and partnerships are popular business structures, particularly in the early stages of operation, the incentives listed here are only available to companies.

Early stage innovation companies share much in common with any new business venture.

Aside from choosing the right structure, directors also need to:

• Understand the differences between employees and contractors;
• Differentiate between their roles as business owners and employees;
• Work out how they will pay themselves;
• Implement shareholder agreements;
• Work through funding options.

LDB has helped numerous businesses take their first steps and guided them as they have gone on to grow and thrive.

This includes helping them to make the most of all the available tax incentives.

Why not put that experience to work in your next entrepreneurial venture?

Give us a call on (03) 9875 2900, or fill in the contact form below, and let’s chat.