AusBiotech submissions say employee share scheme eligibility too tight

Two AusBiotech submissions have asked the federal government to broaden the eligibility criteria for employee share schemes (ESSs) to allow extra benefits planned for start-up companies to extend to listed companies eligible for the refundable Research and Development (R&D) Tax Incentive.

Responding to the call for comment on ESS and pre-Budget submissions, AusBiotech has asked the government to expand the definition of a start-up as the proposed legislation is too tight and is unhelpful for a number of biotechnology companies.

Under the definition in the draft legislation, a start-up company means an Australian employer that offers for acquisition ESS interests in an unlisted company with an aggregated turnover not exceeding $50 million, and having been incorporated for less than 10 years.

The requirement for all three conditions to be met to be an eligible start-up will exclude many biotechnology companies - notably those who list on the Australian Securities Exchange early in their life cycle to raise capital for their research programs, despite having no or negligible turnover and yet to make profits. It is often assumed that listed companies are liquid and have ready access to capital. That’s not the case in the biotechnology sector and these companies can remain start-ups in every other sense.

Furthermore, the condition that the company be under 10 years old is restrictive for the biotechnology sector, as many start-up companies would not have reached the point of sales revenue by this time. Extending this time to 15 years would be more appropriate, said AusBiotech.

While acknowledging that defining a ‘start-up’ is fraught with issues, for this eligibility definition to fit the intent to support innovation without being too broad, AusBiotech suggested using the existing definition (with an extension to 15 years) and also allowing for listed companies that meet the eligibility criteria for the refundable R&D Tax Incentive (aggregated turnover under $20 million) to be included. While this would allow an expanded access to ESSs, it would support legitimate R&D companies in their early phase and limits the eligible population to a justifiable cohort.

The exemption for start-up companies recognises the difficulty innovative start-up companies face in developing their technologies, while retaining highly skilled workers. It is also critical that it be appropriately targeted. The current definition will inadvertently exclude the type of company it seeks to assist, the organisation says.

Read the full AusBiotech submission regarding the draft legislation to improve the taxation of ESSs.

The pre-Budget submission noted the same issues and also reiterated calls for:

• Tax reform, where tax incentives are made an asset for innovation and business, with four pillars:
  - Retain the R&D Tax Incentive intact and lift the $20 million cap for the refundable component to $50 million in line with the Cutler recommendations of 2008;
  - Introduce the Australian Innovation & Manufacturing (AIM) Incentive to incentivise the monetisation of IP, and in turn innovation, and retain the associated benefits once it reaches commercialisation;
  - Introduce fiscal incentives for investors in pre-revenue and start-up companies, to encourage ‘patient’ venture capital; and
  - Restore the ESS to its pre-2009 form, at least for start-up companies. (As noted above, the draft legislation is in consultation).
• The government to support commercialisation with the dedication of a significant portion of the Medical Research Future Fund (MRFF) proceeds, material to achieving the policy intent, to the translation of research, in line with the ‘Strategic Review of Health and Medical Research (2013)’ (the McKeon Review) recommendations.
• Progress on the most important of the clinical trial recommended reforms; harmonisation across the states and territories of Australia for clinical trial ethics and governance approvals.

Read the full pre-Budget submission to the Treasury