AusBiotech has worked with its members to develop an investor incentive model to stimulate and encourage investment in start-up and pre-revenue companies, which has formed a supplementary submission to the Federal Government’s Tax Review and White Paper process.
AusBiotech is advocating for greater incentives to encourage investors to provide capital to the life science sector’s young, innovative companies. In particular, there is a gap in the various incentives that exist to encourage investors to ‘park’ their capital in pre-revenue, pre-dividend companies for three years or more. These so-called ‘patient investors’ are desirable as they provide more stability and certainty to start-up companies.
Long-term venture capital investment is an area where the ‘market’ is failing in Australia, thereby impacting the biotechnology industry’s ability to grow at its potential rate.
Access to capital is critical to the success of small, start-up companies, but even more-so for life sciences companies that have unique business model, notably that they can be pre-revenue (and therefore non-dividend-paying) for a decade or more before they reach marketing/regulatory approval, while needing tens or hundreds of millions of dollars for research and development (R&D).
In the current climate of structural shifts in the economy and the recognition that innovation is a key driver of productivity and therefore the economy, the use of the tax system to promote growth in innovation is sensible and enables Australia to address the market failures that currently stifle innovation in its early stages.
There are a number of models for other countries that were considered in discussions on an appropriate model. The model proposed in the submission draws on the strengths of these and adds some components to best fit Australia’s needs – and offers an incentive for individual investors, complying superannuation funds, including self managed super funds, and pooled and collective investment funds.
It is proposed that:
- Investors obtain 30% up-front tax offset (credit) for the cost of investing in qualifying companies. The 30% is benchmarked against comparable schemes in other countries, like the UK.
- If the investor exits within the three years, there is a proportionate claw-back of the incentive. For example, an exit in less than two years could trigger a full claw-back and exit between two and three years could trigger a 50% claw-back. No claw-back would apply after investment has been held for three years.
- If qualifying for the 30% offset (i.e. have held the investment for three years), an additional capital gains tax exemption would apply for a period of lengthy holding (to be determined). For example, 50% capital gains tax (CGT) reduction if holding for four years, and 100% reduction if holding for five years.
- If the qualifying company has carry-forward tax losses, which are outside the R&D regime, it can offer to give up those tax losses in exchange for the investors obtaining an additional up-front tax deduction. An additional deduction could be calculated based on the amount of tax losses foregone by the company.
- Reinvestment incentive – After the investment has been held for the initial three years, the funds can be re-invested into another qualifying company, and the investor would remain eligible for the CGT benefit.
The model’s underpinning principles included:
- An imperative to broaden the base (type) of investors in pre-revenue companies, particularly to ‘mum and dad’ investors and self managed super funds;
- Be ‘agnostic’ to whether the company is listed or unlisted;
- Use as eligibility criteria, the R&D Tax Incentive’s refundable component (i.e. turnover of company and associates less than $20 million), which is well defined and would ensure benefit goes to the appropriate companies;
- Enable investments via individuals and collective investment vehicles;
- Encourage ‘parking’ of investments for long periods of three years or longer;
- Be technology-neutral but allow for unique issues in biotech (such as longer development times).
The supplementary submission builds on AusBiotech’s submission to the Tax Discussion Paper (1 June 2015). Read the first submission here. The supplementary submission can be viewed here.
For more information, please contact AusBiotech’s Chief Industry Affairs Officer, Lorraine Chiroiu (lchiroiu@ausbiotech.org).