Foundations of Taxation Law

Income tax systems commonly contain a broad range of tax incentives. These incentives are tax expenditures as they are an indirect form of government spending designed to benefit targeted taxpayers. Based on the income tax formula, the principal ways that tax incentives may be provided are by granting special exemptions, deductions, tax offsets or reduced tax rates. This chapter examines a number of intricate tax incentive programs that have been established by the Australian Government to encourage certain forms of investment. In particular, it examines various programs that support investment in start-ups and other entrepreneurial ‘small and medium enterprises’ (‘SMEs’). These entities have the potential for rapid growth and play a key role in Australia’s innovation system. However, because of their risky nature, they often find it difficult to borrow money and need to rely heavily on equity finance. This form of finance is known as ‘venture capital’ and comes from two main sources: angel investors (ie wealthy entrepreneurs and business people) and venture capital funds (ie funds run by professional fund managers).