Start-up Funding: Legal Changes to look for in 2016 (Part 2)

We aim to deliver Just, Redemptive Outcomes®

In our previous article we looked at several of the Australian Government’s funding and reforms as part of the National Innovation and Science Agenda.  The $1.1billion Government funded initiative aims to support and boost Australian entrepreneurship and innovation, such as start-ups. We will cover several of these start-up funding changes in this article, our second part of this series.

Start-up Funding

  1. Employee Share Scheme Reforms

Employee share schemes (ESS) are usually offered to employees for the dual purpose of aligning their interests with that of the company, and allowing cash-poor companies (especially start-ups) to propose incentives beyond a traditional salary. Under current legislation, any company intending to offer an ESS is required to prepare and lodge a disclosure document with the Australian Securities and Investments Commission (ASIC). This document is made publicly available.

Following the advice from stakeholders that requiring commercially sensitive information be disclosed to competitors was preventing start-ups and small businesses from considering an ESS, the Commonwealth is now seeking to limit or completely remove the requirement for SME disclosure. No concrete indication has been given as to the form this will take; we intend to publish a more detailed article once additional information is forthcoming.

  1. Insolvency Reform

Entrepreneurs have to take high financial risks when creating start-ups, which in some cases leads to business failure. The current laws make it very difficult for companies and individuals to recover from these set-backs with investors pulling out at the first sign of insolvency and legislation imposing harsh bankruptcy/insolvency penalties.

The Government proposes to reform the current laws surrounding insolvency in an attempt to encourage entrepreneurship while still protecting creditors. The proposed insolvency reforms include:

  • “reducing the current default bankruptcy period from three years to one year;
  • introducing a ‘safe harbour’ for directors from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company; and
  • making ‘ipso facto’ clauses, which allow contracts to be terminated solely due to an insolvency event, unenforceable if a company is undertaking a restructure.”

A proposed paper detailing the reform is to be released in 2016 with further legislation expected to be introduced and passed in mid-2017.
Great care will need to be taken in striking a balance in providing an opportunity for failed entrepreneurs and businesses to ‘bounce back’ from financial hardships, whilst still protecting and encouraging creditors to continue investing in these initiatives. The insolvency law reforms will still need to deter and penalise individuals who are fraudulent, reckless or negligent with company assets. We shall cover the proposed reforms when they are made available in 2016-2017.

  1. Intangible Asset Depreciation

Business assets normally have a depreciating effective life that they can be claimed for tax purposes. Under the current legislation, businesses can work out their own effective life of ‘tangible depreciating assets’ (such as vehicles, computers and work-tools), however all ‘intangible assets’ (such as patents, copyright and other forms of intellectual property) are already prescribed by the Uniform Capital Allowance (“UCA”) rules  and have a set amount of years it may be claimed for taxable purposes.

This means that innovation companies with large amounts of intangible assets which have a shorter economic life than the life in the prescribed UCA effective life will not be able to take full advantage of the tax benefits.

The new proposed arrangements will now mean intangible assets will be able to be self-assessed. For example, if a company’s in-house software’s estimated effective life is only 2 years, the company will be able to set the effective life to 2 years and claim a larger tax deduction over a shorter period rather than the UCA’s prescribed 4 years. This makes investment into intellectual property (and other intangible assets) with a short-term life a much more viable option for small businesses and start-ups.

 It is important to note, however, that these changes will only apply to assets acquired from 1 July 2016. Businesses are strongly recommended to seek professional advice from their accountants and solicitors when considering if to invest in such intangible assets.

These changes form just some of the initiatives announced in the National Innovation and Science Agenda. We will continue to publish on the upcoming changes as more information becomes available. Further information on the above changes can be found at http://www.innovation.gov.au/.

If you represent a start-up or SME and wish to prepare your company for the “ideas boom”, please contact our Business Development Team on (07) 3252 0011.

By Matthew Shearing and James Tan