The Industry Innovation and Competitiveness Agenda: Encouraging Start-Up Businesses and Foreign Investment

October, 2014

By Warwick Painter, Partner and Jacqueline McStay, Senior Associate

The Federal Government has released its highly anticipated Industry Innovation and Competitiveness Agenda (Agenda), which is a blueprint of the Government’s plans to increase Australia’s competitiveness and annual productivity growth rate.  It covers a broad range of initiatives designed to streamline regulation, encourage innovation and break down barriers to investment.

What is the Agenda?

The development of the Agenda was first announced by the Prime Minister, Tony Abbott in December 2013 in the wake of Holden announcing that it would be shutting down its Australian car manufacturing operations in 2017.

It was prepared by a senior Government Taskforce comprising Mr Abbott (as Chair), Treasurer Joe Hockey, Industry Minister Ian Macfarlane and Trade and Investment Minster Andrew Robb.  The Taskforce consulted closely with the Government’s Business Advisory Council, which consists of prominent Australian and global business leaders including executives from National Australia Bank, Linfox, BlueScope Steel, Grocon, Bega Cheese, Telstra and BHP Billiton.

The Agenda outlines four main goals for the future of Australia:

The Government intends to achieve these goals by implementing a total of 17 separate initiatives described in the Agenda, with a focus on:

Encouraging Start-Up Businesses and Foreign Investment

Two major initiatives which are flagged in the Agenda are likely to have a direct impact on start-up businesses and fund managers.  These are:

  1. encouraging employee share ownership through more liberal tax deferral for employees receiving shares and options; and
  2. broadening and targeting foreign investment through a reform of the investment focus of the Significant Investor Visa (SIV) programme as well as encouraging higher levels of investment through a new Premium Investor Visa (PIV) programme.

In this article we highlight the main areas of interest for those who may be affected by these two key changes proposed under the Agenda.

Reintroduction of tax deferral for employee share schemes

One of the headline recommendations of the Agenda is that tax deferral for employee share schemes be re-introduced.  This will give small and start-up businesses more flexibility in how they go about attracting talent and retaining employees by deferring the taxation of benefits represented by discounted share options or shares as part of a salary package.

When a small or start-up company grants share options for nominal cost or issues shares in the company at a discount, the employee receives a “benefit” which is potentially taxable. Previously, employees were allowed to defer any taxation on the benefit associated with options until the option was actually exercised.

However, in 2009, the Australian Government effectively killed off the issue of share options when it changed the law to tax benefits immediately on receipt of options rather than allowing participants to defer their tax liability until the options were exercised and shares received.  This change was intended to prevent executives from minimising their tax, however it also made it much harder for start-up ventures to succeed. This is because start-ups often use share options instead of higher salaries to attract and retain employees in the developmental stage of their business, with the prospect of a greater return for the employees when the company grows. The changes to the law also increased the complexity of complying with the tax rules regulating share schemes, making navigating the various rules for establishing and implementing such schemes both time consuming and costly.  This acted as a further deterrent for small businesses to use share incentives in their salary packages.

The Agenda recommends that the changes to the taxation of employee share schemes be reversed so that, for all companies, options will be taxed at the time they are converted to shares, rather than when the employee acquires the options.  Some eligible start up ventures will also be able to offer shares or options to employees at discounted rates without the employee being required to pay tax up front.

These changes are expected to benefit a range of start up businesses and employees who own shares in the company for which they work.  It will also complement current ASIC proposals to review the disclosure and offering rules surrounding employee share schemes. Together, the initiatives could minimise the costs and complexity for companies of establishing and maintaining such plans.  These proposals will be a welcome change for small businesses and start-up ventures.

The Department of Treasury will engage with key stakeholders (including consultation with ASIC) to refine the proposed legislation before it is introduced.  The Government expects the legislative changes to come into effect on 1 July 2015.

Reforming Australia’s Significant Investor Visa programme

In addition to reforming and streamlining Australia’s skilled migration visa scheme, the Government has flagged in the Agenda its proposal to make substantial changes to Australia’s investment visa regime by enhancing the laws regulating the Significant Investor Visa (SIV) programme.

It is proposed that the SIV regulations be amended so that:

Currently, the criteria for a “complying investment” under the SIV are quite broad and non-prescriptive as to the classes of investment which can be held in order to qualify for and maintain a 188 Temporary Visa (and ultimately to qualify for an 888 Permanent Visa).  These categories include: government bonds; interests in an Australian business owned by a proprietary company; and units in a managed fund with a mandate for investing in a wide range of categories such as Australian infrastructure, bonds or term deposits issued by Australian financial institutions, cash held by Australian ADIs, Australian real estate and Australian agribusiness.

Because SIV applicants must also be nominated by the State or Territory in which they propose to reside, some States and Territories have endeavoured to direct the investment in a way that will economically benefit that State or Territory. However such requirements have usually been quite general in nature and do not target specific sectors for investment. It appears from the Agenda that the Government intends on change occurring at a Commonwealth level and will work with AusTrade to amend the investment criteria for a “complying investment” with the intention of supporting key areas of national economic priority.

Whilst the key areas for targeted investment are not identified in the Agenda, it is reasonable to expect that they could align with one or more of the industry sectors that are outlined in the Agenda as being key to Australia’s growth:

We expect that the formulation of the amended investment criteria will need to be finely balanced to ensure that any initiatives to direct complying investments for benefit of the Australian economy as a whole do not act as a disincentive to the high net worth investors who the Government is seeking to encourage through the SIV and PIV programmes. It may be that the managed funds through which the investments are often collected will need to be more engaged with the Government in order to align their investment mandates with the targeted areas of national economic priority.

Specifically, the reforms to the Significant Investor Visa programme will be as follows:

It is expected that changes to the SIV programme will take effect during the next 14 months.  The Premium Investor Visa is scheduled to be implemented from 1 July 2015.

Whilst changes to the SIV programme are being rolled out, fund managers and trustees administering funds targeted at these visas, will need to re-examine their funds to ensure that they remain compliant under the amended regimes. They may also need to prepare for more direct engagement with AusTrade and the Government in order to ensure that they continue to offer complying investments under the SIV and PIV programmes. We will provide regular updates as further announcements about the visa regime changes are made by the Government.

Contact Mills Oakley

The Corporate Advisory team at Mills Oakley Lawyers are experienced in advising on and preparing employee incentive schemes for listed and unlisted public companies and managed funds, as well as for private and start-up ventures.  For further information about the proposed changes to the laws governing employee share schemes and how they could impact your business, please get in touch one of the Partners in our Sydney Corporate Advisory team – Warwick Painter, Simon Champion or Gavin Douglas or our Melbourne Corporate Advisory team – Warren Scott or Daniel Livingston.

We also act for a number of local and international fund managers, trustees and custodians and have extensive experience in the structuring, implementation and maintenance of managed funds that are compliant with the Significant Investor Visa programme.  Should you have any questions or wish to discuss how the proposed changes to Australia’s investment visa regime could affect you, please contact one of the members of our Sydney team – Warwick Painter, Partner or Jacqueline McStay, Senior Associate or our Melbourne team – Mark Bland, Partner or Venn King, Special Counsel.

Industry policy team

 

 

 

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