‘More like an obstacle course’: Business network pans IBCC draft laws

The federal government recently published draft legislation for its innovative business CGT concession (IBCC). The exposure draft legislation includes changes from the previous consultation, including extending the 15-year eligibility period to all firms, lowering the minimum holding period to three years, and removing the lifetime cap.

The draft legislation 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.

The Australian Chamber of Commerce and Industry (ACCI) called on the federal government to rework the IBCC.

ACCI CEO Andrew McKellar remarked that the proposed concession “looks less like a carve-out for start-ups and more like an obstacle course”.

“The federal government’s innovative business capital gains tax concession is far too complex, with definitions that are far too narrow, and it will tie up innovative start-ups in new red tape,” he said.

"In the hyper-competitive global economy in which we operate, business believes Australian founders should be focused on building their businesses, not devoting precious time to navigating bureaucratic tax carve-outs."

In its submission to Treasury’s draft legislation, the ACCI addressed the IBCC company definition in the draft legislation, noting that the initial consultation described an eligible company broadly as an unlisted and independent company that was small and innovative. But the exposure draft turns that general description into a series of cumulative statutory requirements, it said, adding that the detailed definition makes the concession harder to access.

Furthermore, the submission said each requirement creates a separate question that the company must answer and support with evidence.

“A start-up may need to identify its affiliates, connected entities and controlled entities. It might need to aggregate turnover across those entities, establish their incorporation dates, classify where staff work, identify where assets are located and calculate how its assets, employees and income relate to qualifying activities,” it said.

Following this, the eligible company would need to demonstrate that it meets five separate innovation principles, satisfy a predominant activity test, complete a registration process, and meet annual reporting obligations, the submission noted.

“Taken together, this creates a highly demanding framework for the businesses that are at the early stage and least able to manage it,” it said.

“Early-stage start-ups do not have an internal tax and legal team and founders. Meeting the IBCC requirements is likely to require a substantial amount of the business owner’s time, as well as legal and accounting advice. This means part of the capital intended to support innovation and commercialisation will instead be spent proving that the company satisfies a tax concession.”

McKellar said that under the proposed regime, even those start-ups who register and store all necessary records could still be caught outside the concession.

“That uncertainty undermines what was signalled to be a structural carve-out for Australian start-ups,” he said.

"The federal government also risks shackling Australian start-ups with this narrow approach. Founders could be forced into an invidious choice: register and stay the course to maintain eligibility for a narrow concession, or pivot to meet the market and risk a big tax bill. That creates more risk for investors too, who are already looking overseas to lower-tax jurisdictions."

ACCI calls for simple definition

ACCI recommended that the definition should be simplified and focused on the economic substance of the business and investment. It also opposed requiring businesses to satisfy “tens” of requirements and add compliance burden on them.

In addition, it asked for clarity in the legislation and supporting guidance on how the rules apply to holding companies, subsidiaries, corporate investors, joint ventures, employee share trusts, intellectual property entities, and foreign subsidiaries.

Addressing the administration of the legislation, the ACCI noted that the exposure draft divides administration between the Department of Industry, Science, and Resources, and the ATO. The industry secretary would administer company registration and certain rulings concerning company eligibility and disqualification.

The ATO would assess investor claims and administer the income tax consequences. The agencies may exchange information relating to the CGT concession.

“This arrangement risks duplication, confusion and creates compliance costs for businesses,” the ACCI said.

“A company should not be required to give substantially the same information to two regulators. An investor should not face one view from the Industry Secretary on company eligibility and another from the ATO when the concession is claimed.”

The ACCI recommended that the government should establish a single business-facing administrative process. It added that information provided through registration should be available to both agencies, and company-level matters accepted by the industry secretary should bind the ATO where the information provided was complete and accurate.

Alongside this, registration forms, annual reporting requirements, fees, guidance and service standards should be published before commencement, the ACCI emphasised.

“Businesses and investors need to understand the total compliance burden before the legislation is finalised,” it said.