House of Representatives

Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017

Second Reading Speech

Mr Sukkar (Deakin-Assistant Minister to the Treasurer)

I move:

That this bill be now read a second time.

On 7 December 2015, the government announced a package of measures designed to incentivise and reward innovation as part of its National Innovation and Science Agenda, which is driving the smart ideas that create business growth, local jobs and global success.

The measures in this bill are part of that agenda.

These measures will improve the tax system for businesses, so that they can ultimately grow and create jobs.

The measures in this bill support businesses by:

increasing access to past year company losses by relaxing the 'same business' test; and
improving the effective life assessment on intellectual property such as patents, and other depreciating intangible assets.

The introduction of these measures follows legislation already introduced to provide tax incentives for angel investors and provide new arrangements for venture capital investment. These measures continue the delivery of the National Innovation and Science Agenda announced in the 2015-16 MYEFO.

With these measures we are better aligning the corporate tax system with a culture of business investment and development to allow Australian businesses to grow and ultimately become more productive.

I will now turn to the specifics of the bill.

Schedule 1 to this bill amends the Income Tax Assessment Act 1997and the Income Tax Assessment Act 1936 to more readily allow companies and some trusts with past year losses to use these losses as a tax deduction against current year profits.

Under current law, where a company has had a majority change in ownership, tax losses made in previous years cannot be claimed as a deduction against current year profits unless the company is conducting the 'same business'.

Under the 'same business' test, these deductions are denied if the company has entered into any new transactions, or earned any income from new business activities.

Interpretation of this test has historically been very strict. Very minimal change in business operations is allowed before these valuable past year losses are ultimately lost to the entity. This can stifle innovation and entrepreneurship.

It can have particularly severe impacts on start-up companies. In the start-up phase, when developing new processes, products or technologies, it is common for businesses to make losses through expenditure on research and development.

Following that development stage, in order to fully commercialise these new technologies, equity investors are often needed to provide additional equity funding to ensure the viability of the business. This may necessitate a change in ownership.

These entities may discover that there are new and innovative uses for their technologies that they had not previously envisaged. The strict operation of the 'same business' test can therefore constrain these businesses from exploiting these opportunities, for fear that they would lose access to what could be very substantial deductions.

In other circumstances, for businesses which are not performing well, and are consistently making losses, the 'same business' test can deter them from making the changes to their business which would return them to profitability.

The new 'similar business' test introduced by this bill will address these concerns, and support entrepreneurship and innovation.

This 'similar' test will be an easier test to meet, allowing businesses to make some changes to their businesses and operations to take advantage of emerging opportunities and create more efficient structures.

In addition, the removal of the tests which prevent businesses earning income from new activities and operations will give entities much greater freedom to explore innovative uses of their products and to adapt to changes in the business environment.

In this way, this measure strongly supports an innovative culture, encouraging agile, adaptable businesses in our modern economy.

Full details of the measure are contained in the explanatory memorandum.

Schedule 2 of this bill amends the Income Tax Assessment Act 1997 to provide taxpayers with the choice to self-assess the effective life of intellectual property, and other depreciating intangible assets they start to hold, on or after 1 July 2016.

The intangible assets to which this choice applies are:

intellectual property, which includes patents, registered designs and copyrights, or the licences to these;
other licences, including spectrum and datacasting transmitter licences;
rights to telecommunication cable systems and telecommunications site access; and
in-house software.

In keeping with the treatment of tangible assets, the new law also allows taxpayers to re-calculate the effective life in later income years if the effective life the taxpayer has been using is no longer accurate because of changed circumstances relating to the nature of that particular asset's use.

The taxpayer must re-calculate the effective life of the asset if the cost of the asset increases by at least 10 per cent in a later income year.

In the income year that the taxpayer begins to hold the asset, the taxpayer must re-calculate the effective life of the asset if the taxpayer is using an effective life because of the associate or same user rule and the asset's cost increased after the taxpayer started to hold it by at least 10 per cent.

Currently, the law mandates the effective life to be used in calculating the decline in value for depreciating intangible assets. This statutory effective life may not reflect the period of time that the assets provide economic benefits to the taxpayer.

By introducing self-assessment, this measure will better align the taxation treatment of those assets with the actual period of time that the assets provide economic benefits.

This better alignment of the economic life and the taxation life will decrease the cost of acquisition of these assets, encouraging their transfer between businesses to better exploit and commercialise them.

Full details of the measure are contained in the explanatory memorandum.

Debate adjourned.