AusBiotech submission re: tax impediments for small business

AusBiotech has made a submission to the Board of Taxation, which is conducting a review to identify features in the tax system that are hindering or preventing small businesses from reaching their commercial goals.

The AusBiotech submission identifies and discusses two tax schemes that discriminate against small business: Employee Share Schemes (ESSs) and the recently announced changes to the Research and Development (R&D) Tax Incentive. AusBiotech also noted two new tax measures which, if implemented, would be of assistance to small and start-up technology companies.

Changes made to ESSs in 2009 introduced a disincentive to staff by moving to compulsory taxation of shares and options prior to the realisation of any value. As a result, the majority of companies deserted the scheme. The requirement for valuations of pre-revenue technology companies also provides an unnecessary impost on small business and is almost meaningless for R&D companies. AusBiotech urged that the 2009 changes be repealed.

AusBiotech noted that the 1.5% reduction to R&D Tax Incentive, which was announced in the May 2014 Federal Budget, is expected to be neutralised by the 1.5% reduction to the corporate tax rate (effective 1 July 2015). This expectation fails to take account of the impact on the many pre-revenue small companies that are in tax loss (and therefore don’t pay corporate tax). For them, this is a permanent and potentially damaging reduction to the support available for R&D as they will not get any benefit from the planned corporate tax reduction.

The submission suggested that two new tax measures would complete an end-to-end reform that would work together to keep Australia internationally competitive and encourage desired economic activity and growth.

AusBiotech has been advocating on the basis of fours pillars to tax reform. Two of these are mentioned above - repair the ESS provisions to support small companies and retain the R&D Tax Incentive intact. A further two pillars include:

• The introduction of the Australian Innovation and Manufacturing (AIM) Incentive, a patent box-style incentive to keep home-grown intellectual property (IP) once it reaches commercialisation, as well as associated manufacturing, in Australia; and
• The introduction of a fiscal incentive for investors in pre-revenue companies, such as a model-based capital gains tax exemption, share flow-through scheme or the UK’s Enterprise Investment Scheme.

The full submission can be found here; AusBiotech’s policy position on the ESS can be found here; and AusBiotech’s policy position on the AIM Incentive can be found here.

AusBiotech believes Australia needs innovation to continue productivity growth and encourage new industries to supplement declining industries. If Australia’s tax system does not provide a conducive environment, with competitive incentives, for small and start-up companies, these technology ventures are undermined and Australia’s best ideas and the resulting economic benefits are then developed, manufactured and managed in other countries.

Australia’s development as a knowledge economy means that our intangible assets are becoming more globally mobile than ever before. Companies can move the advantages of their IP around the world to enjoy the most favourable tax treatments and incentives. The spillover benefits of managing, developing and monetising IP - such as jobs, manufacturing, exports, clinical trials and associated service businesses - go too. AusBiotech believes that if Australia is serious about being internationally competitive, tax incentives need to keep up with the provisions of our major trading partners to maintain international competitiveness by introducing a patent box-style incentive.