Early Stage Innovation Company (ESIC) Tax Incentives
The ESIC Tax Incentives reward investors in Early Stage Innovation Companies with a tax offset equal to 20% of equity invested and an exemption from capital gains tax.
What are the ESIC Tax Incentives available to investors in qualifying companies?
A non-refundable carry-forward tax offset equal to 20% of the value of equity invested in a qualifying ESIC (s). The offset is capped at $200,000 per investor per year. And
Exemption from capital gains tax (CGT) for investment in shares in a qualifying ESIC company. Shares need to be held for at least 12 months and disposed within 10 years of allotment.
How does a start-up company qualify as an Early Stage Innovation Company (ESIC)?
A company will qualify as an ESIC if it meets both of the following tests at the time of issuing shares to an investor seeking the ESIC Tax Incentives:
The Early Stage Test; and
The Innovation Test.
1. The Early Stage Test
To meet the early stage test, a company seeking the ESIC Tax Incentives for its investors must meet all the following requirements:
Incorporated in Australia within the last 3 years or within the last 6 years if the company has expenditure of less than $1M in the latest three income years.
The company has less than $1M of expenditure in the last income year.
The company has less than $200K of income in the last income year.
The company is not listed on any stock exchange in Australia or overseas.
2. The Innovation Test
The innovation test can be passed by either the points based approach or principle based approach.
To qualify under the points based approach, a company will need to accumulate at least 100 points by meeting certain objectives. The ATO has set out a table which outlines the objectives required to accumulate points under this approach.
To qualify under the principle based approach, a company must demonstrate the following:
Genuine focus on developing new or significant improved innovations
High growth potential
Potential to address a global market
Records such as a business plan, commercialisation strategies and SWOT analysis can help a company substantiate the above criteria. Given the subjective nature of this test, we highly recommend that the points based approach is explored first before considering the principle based approached.
Which investors qualify for the ESIC Tax Incentives?
An investor can qualify for the ESIC Tax Incentives if the investor:
Invests in newly allotted shares in a qualifying Early Stage Innovation Company (ESIC);
Is not affiliated with the Early Stage Innovation Company (ESIC);
Does not hold more than 30% equity in the Early Stage Innovation Company (ESIC);
Is a sophisticated investor. (Non-sophisticated investors will only qualify for the ESIC Tax Incentives if the value of their ESIC investments is less than $50K for the income year.)
In the case of convertible notes, the above tests will need to be considered at the time the convertible note is converted into equity and not at the time the convertible note is issued.
How can Enterprise1 help?
Given the self-assessed nature of the ESIC Tax Incentives, both companies and investors may be uncertain or concerned about eligibility. The team at Enterprise1 have designed a fix-fee service offering that will boost investor and company confidence by addressing the following:
Provide a written statement of advice outlining how your company qualifies as an Early Stage Innovation Company (ESIC);
Providing a written statement of advice to each investor outlining their eligibility for the ESIC tax incentives;
Prepare and lodge year-end ATO mandated ESIC reporting forms.
If you would like to know more about obtaining the ESIC qualification for your company, or if you are an investor who might qualify for the tax offset and capital gains tax exemption, please contact our office; — Link to Contact Form.