BDO calls for greater clarity and guidance on IBCC

BDO Australia stressed that clarity on the distinct policy purpose and interaction between the IBCC and Early Stage Innovation Company (ESIC) regimes is needed.

“Investors, founders and advisers may struggle to understand why an investor qualifies under one regime but not the other, and how the concessions are intended to apply across a company’s lifecycle and fundraising journey,” the submission read.

The accounting body said that the availability of worked examples about how the regimes apply at different stages of the company’s lifecycle and fundraising journey will be crucial for those impacted by the changes.

Clarity on tests

The proposed legislation introduces a test to prove that at least 50 per cent of the “people engaged by the company” perform services primarily in Australia.

In its submission, BDO said that further clarity is required regarding the test, particularly where a company engages an overseas entity to provide services.

“This could create significant compliance burdens and inconsistent outcomes depending on how services are structured, rather than where substantive innovation activities are undertaken,” the firm said.

Further, as part of the reform’s predominant activity test, it requires more than 75 per cent of assets, employees, or income that relates to the commercialisation of innovation satisfying the innovative company test.

The firm stressed that neither the draft law nor the explanatory memorandum provides sufficient guidance on how the thresholds are measured in practice.

“The uncertainty may create significant compliance costs and discourage reliance on the concession. It is also likely to be particularly difficult for existing companies seeking to access the transitional rules, as they may be required to reconstruct historical information regarding how employees, assets and activities were deployed in prior years,” BDO Australia’s submission read.

For clarity, the firm stressed that whether the test is applied based on time, cost, headcount, FTEs, revenue contribution, asset value, management estimates or another methodology should be made clear.

A further compliance risk that the firm identified was that the reform introduces retrospective company registration cancellation. According to the draft law, this could occur if the administering authority concludes that the company was never entitled to the registration, and result in the company being treated as if never registered, leading to the revocation of the concession years after the investment.

In addition, the failure to lodge an annual report will result in the suspension of a company’s registration, leading to investors’ interests becoming disqualified assets during the suspension period.

“This creates unnecessary compliance risk for investors because a concession attached to their investment can be affected by a company’s administrative omission. The consequence is disproportionate where the company continues to satisfy the substantive eligibility conditions,” the submission read.