2014-15 Federal Budget announcement
13 May 2014
- IIF, Commercialisation Australia programmes abolished
- Entrepreneurs' Infrastructure Programme established
- Medical Research Future Fund established
- Company tax rate cut of 1.5% from 1 July 2015
- Decrease in R&D Tax Incentives by 1.5% from 1 July 2014
- Start date of new MIT tax regime deferred to 1 July 2015
- Government still seeking advice on s25-90 targeted integrity rule
- Changes to foreign resident CGT principal asset test
The IIF was established in 1997 to address the failure of markets to provide capital for early stage ventures. Successful investments made through the programme have included companies such as SEEK.com. Numerous reviews have supported the continuation of the programme and found that it delivers on its goal of filling the venture capital funding gap and brings significant public benefits by backing innovative start-ups. It has become increasingly important in recent years due to the depletion of private early stage funding, with the Government’s 2013 Australian Innovation System Report showing that VC availability has deteriorated steadily since 2006.
The Government has announced that as part of its plans to achieve savings of $845.6 million over five years, it will be abolishing a number of programmes from 1 January 2015, including the 15-year old Innovation Investment Fund (IIF) and Commercialisation Australia.
The Government will implement a new approach to industry policy by providing $484.2 million over five years to establish a new Entrepreneurs' Infrastructure Programme. It should be noted that this amount is only slightly over half of the amount previously allocated to various industry programmes aimed at innovation, which will be abolished.
The Entrepreneur's Infrastructure Fund will focus on supporting the commercialisation of good ideas, job creation and lifting the capability of small business, the provision of market and industry information, and the facilitation of access to business management advice and skills from experienced private sector providers and researchers.
AVCAL will engage with the Government to identify further details in relation to this new programme over the coming days.
The Government will establish the Medical Research Future Fund (MRFF) on 1 January 2015 to provide additional funding for medical research, including through payments to the National Health and Medical Research Council.
The MRFF will be seeded with $1 billion from uncommitted funds in the Health and Hospitals Fund (HHF). Amounts equal to the estimated value of health savings measures published in the 2014-15 Budget will be reinvested in the Fund until it reaches a target capital level of $20 billion from 2014-15 to 2019-20.
Net interest earnings on MRFF capital will be available for drawdown the following financial year. The capital of the Fund will be preserved in perpetuity. Investments in the MRFF will be managed by the Future Fund Board of Guardians in accordance with an Investment Mandate issued by the Treasurer and the Minister for Finance. The establishment of the MRFF will be subject to the passage of health savings legislation.
It is currently unclear how much, if any, of this funding will be specifically channelled in to the commercialization of medical research.
The McKeon Review last year identified that Australia has a strong medical research capability but a poor track record of translating much of this research into health and commercial benefits. This means that the nation misses out on the health, commercial and broader economic benefits of translating more early stage research into usable outcomes.
Healthcare and life sciences is the largest sector backed by VCs (receiving $427m in VC funding in FY07-13, or 44% of total VC investment over this period). However, this trend has been declining in recent years due to the depletion of public and private investment funding.
Our medical translation industry represents an obvious and critical opportunity for investment in Australia's future. The biotechnology, pharmaceuticals and medical technology sectors currently support over 50,000 Australian jobs. The biomedical industry is our largest high-technology exporter with almost $4bn in export value in 2010–11, more than even the automotive industry, and makes the most R&D investment in the manufacturing industry ($1bn in 2009–10) (McKeon Review 2013, p.210).
As previously announced in MYEFO, the company tax rate will be cut by 1.5 percentage points from 1 July 2015. For large companies, the reduction will offset the cost of the Government’s Paid Parental Leave levy. For up to 800,000 small and medium-sized companies it will provide a net boost to profitability.
The rates of the refundable and non-refundable tax offsets for expenditure on eligible R&D activities will be reduced by 1.5 percentage points, effective from 1 July 2014.
This measure is estimated to provide a gain to the Budget of $620 million in fiscal balance terms over the forward estimates period. In underlying cash terms, the gain to the Budget is $550 million over the forward estimates period.
The Government has announced that the start date for the new tax system for managed investment trusts (MITs) will be deferred by 12 months to 1 July 2015, to allow industry and the ATO additional time to implement system changes. Additionally, the Government will amend the law to allow MITs to continue to disregard the trust streaming provisions for the 2014-15 income year. Exposure draft legislation in relation to the new tax regime is expected to be available for public comment in June 2014.
The previous Government had proposed to repeal s25-90, with effect from 1 July 2014. This would have effectively repealed the provisions that provided a deduction for ‘debt deductions’ (such as interest) incurred in relation to debt used to make investments in foreign companies that generate exempt dividends.
In November 2013 the current Government said it would not proceed with this measure, but will instead consult on a targeted integrity rule.
In the 2014-15 Federal Budget the Government has said that it is still seeking advice on this matter.
On 14 May 2013, the previous government announced amendments to the foreign resident CGT Principal Asset Test which would:
- value mining, quarrying or prospecting information and goodwill together with the mining rights to which they relate; and
- remove the ability to use transactions between members of the same consolidated group to create and duplicate assets.
On 4 November 2013, the Government announced that it would proceed with the announced amendments to the Principal Asset Test.
In conjunction with the 2014-15 Federal Budget, Treasury has released exposure draft materials in relation to these measures.
The proposed amendments include a change that has been made to the scope of the asset duplication measure. In particular, its scope is not restricted to entities that are members of the same consolidated group or MEC group.
The exposure draft explanatory memorandum notes the Government’s decision to defer proceeding with the mining valuation measure pending the outcome of ongoing litigation of the issue.
Author: Adrian O’Shannessy, Director, Greenwoods & Herbert Smith Freehills
Author: Dr Kar Mei Tang, Head of Policy and Research, AVCAL