Expand IBCC safe harbours for ‘bootstrapped’ businesses, says COSBOA

The Council of Small Business Organisations Australia (COSBOA) has lodged its submission to Treasury’s draft legislation on the innovative business CGT concession (IBCC), in which it stated the exposure draft introduces obligations that were not settled at the consultation paper stage.

These include a registration requirement, an annual reporting requirement, and automatic suspension and cancellation consequences that fall on investors rather than on the company whose conduct triggered them.

“Together, these materially increase the administrative burden imposed on the smallest firms the concession is intended to reach,” the submission said.

The draft legislation for the government’s proposed IBCC provides a 50 per cent discount on capital gains from early-stage investments in innovative startups. It defines an IBCC company broadly as a company incorporated for less than 15 years, based in Australia, and not controlled by another company incorporated for 15 or more years.

“An IBCC company must not be listed or have aggregated turnover exceeding $50 million and must satisfy the innovative company and predominant activity tests requiring that it must have as its predominant activity an activity or activities relating to the development for commercialisation of a genuinely innovative product, process, service or method,” the memorandum read.

COSBOA’s submission highlighted that the body is specifically concerned with whether an ordinary Australian small business that is genuinely innovating without a venture capital investor, accelerator place, or an in-house tax function can determine that it qualifies, can register, remain registered, and give its founders, employees, and early backers a reliable answer about their tax position.

“Based on our reading of the exposure draft and subsequent materials, COSBOA’s view is that a small business will not be able to access this concession without professional advice,” the submission said.

COSBOA recommended that Treasury expand safe harbours so bootstrapped and founder-led businesses can demonstrate innovation and scalability without venture capital, an accelerator placement, or a formal employee share scheme.

It said that the innovative company test in the exposure draft is principles-based where a company must be genuinely focused on developing a new or significantly improved product, process, service, or method for commercialisation. The draft also said the business must have high growth potential, demonstrate the potential to scale, address a market that is broader than the local market, and hold competitive advantages.

“These are judgments, not clear measurements,” the submission said.

“In our July submission, COSBOA noted that innovation-related judgments are inherently less objective than simple turnover or time thresholds, and that the resulting uncertainty is particularly challenging for founders, early employees and individual investors who may not know for many years whether their interests will qualify. COSBOA re-iterates this point again for the purposes of this consultation.”

COSBOA continued that it views the conditions around the requirements of the innovative company test as almost entirely drawn from the markers of a venture-backed company, where each condition is a proxy and the proxies chosen are the traces that institutional capital leaves.

“A business that funds its development out of revenue and keeps its own equity leaves none of those traces, however innovative it is, so the conditions do less to measure innovation than to measure whether a company has been through a professionalised funding process,” the submission said.

“This results in an unfair environment for a business that does not opt to go down this route. A self-funded company could usually reach the innovation, growth and competitive advantage limbs on its own; however, the scale limb’s conditions require external capital which a profitable business may not have any reason to consider.”

As such, COSBOA recommended that the conditions be expanded so that a bootstrapped founder-owned company can satisfy every limb of the innovative company test without external venture capital.

It pointed out that conditions such as sustained growth in employee headcount, sustained reinvestment of retained profits into developing the innovation, or growth in revenue earned from the innovation would demonstrate capacity without requiring outside capital.

COSBOA also noted that the government simultaneously released exposure draft legislation on the research and development tax incentive (R&DTI). However, for the purpose of the IBCC, it recommended that a safe harbour built on R&DTI registration has to keep working as the R&DTI itself changes.

Additionally, it recommended publishing plain-English guidance on each limb of the innovative company test and the predominant activity test.

“Adequate departmental resourcing should be provided for this, given the volume of registrations anticipated,” COSBOA said.