Federal Tax Incentivised SME Investment Programs

Last week we covered the R&D Tax Incentive Scheme and the fact that it is not a direct investor incentive, has significant drawbacks, but is the most siginificant of the incentive programs, by volume of dollar benefits claimed.

This week we discuss what has historically been the only direct investor incentive, the Angel Investment Tax Incentive Scheme.

R&D Tax Incentive Scheme;
Personal Direct Investment Incentives
The Venture Capital Program
Matrix of Programs
Optimised Incentive: Self-Managed VC Funds

Direct Personal Investment

There are essentially two forms of SME equity investment, direct personal investment, or indirect managed investment.  With regard to tax incentive programs, until today the Angel Investment Tax Incentive Scheme has been the only program available to direct SME investment.

The distinction is important because direct personal investment provides many benefits sought by investors, primarily investment decision making and non-dilution of investment returns.

However, in real terms most direct personal SME investment does not confer enough control or influence over the investee and those investments are of an illiquid nature so that there is very little actual scope for material investment decision making.  Still, it would seem by the fact that the vast majority of Australian SME investment is direct investment, that most investors would rather deal with those limitations than deal with investment managers.  Or perhaps it is that they have had very little access to suitable managed investments.

Angel Investment Tax Incentive Scheme

Undoubtedly, the AITI is a vast improvement on the tax incentives previously available to direct SME investors (i.e. nothing).  Some investors have been make great use of the AITI, plus venture management is given a far better opportunity to promote its AITI compliant status so as to influence potential investors.

However, the AITI is quite limited and is not available over a very broad range of potential SME investments, itis complicated to assess and to remain a compliant investment.

The tax incentive exempts capital gains tax only, but in very illiquid investments with extremely limited exit management options (particularly if the investment is tanking) and extremely high failure rates any capital losses are lost.

The ESIC compliance test renders compliant investments as only the most speculative, so inability to utilise capital lossess is particularly painful.