Bring back the active business test for the innovative business concession, says employer group

One employer group has lashed out against the predominant activity test in the Treasurer’s innovative business CGT concession (IBCC) draft legislation, which provides a 50 per cent discount on capital gains from early-stage investments in innovative startups.

The employer group called for the test to be scrapped as successfully commercial innovative companies will likely fail the test.

The test looks at the assets, employees, and income of an innovative business, and requires it to have more than 75 per cent of at least two of these three measures engaged in one or more “eligible activities”.

Australian Industry Group head of research and economics Dr Jeffrey Wilson noted in his submission on the IBCC draft legislation that this test was not proposed in Treasury’s initial consultation paper on the concession proposal.

“This [test] will reintroduce the problems of complexity and ambiguity which were addressed for the innovation test through the introduction of the safe harbour legislative instrument,” Wilson said.

“There are credible reasons why an innovative company may cease meeting the predominant activity test in under 20 years. Leading amongst these is the commercial success of the innovation, which will generate revenue, assets and employee bases to sustain the commercial product which are not connected to the original innovation work.”

“In simple terms, an innovative company which successfully commercialises is likely to become non-predominantly (over 75 per cent) oriented to innovation as it matures.”

Wilson emphasised that this new test will introduce added complexity and compliance burden of the IBCC scheme through the creation of new tax administration concepts and clear rules for how to define whether assets, employees or income are primarily associated with the innovation activity compared to the new innovation test.

Further, he stressed that removing the predominant activity test is crucial to avoid unintended and perverse incentives for companies and investors who successfully commercialise innovations.

The Australian Industry Group argued that the Treasury has failed to propose an effective concession with the complexity of its qualification rules.

“To avoid these adverse outcomes, the IBCC should be designed with simpler and more specific eligibility rules, potentially modelled on the 100-point innovation test in the Early Stage Innovation Company (ESIC) program,” Wilson said.

For the group, the concession is crucial for businesses who will be severely impacted by the cost-based indexation method of the new CGT proposals.

As these businesses operate on a very low cost base on establishment, generate investment returns primarily in the form of capital gains, and generate these returns over a very short period, the group said this concession will be a lifesaver for them.