What you need to know about the Early Stage Innovation Company Investor Tax incentives
As part of the National Innovation and Science Agenda (NISA), the ATO is trying to “encourage innovation by aligning our tax system and business laws with a culture of entrepreneurship and risk-taking.”
The idea is to help innovative startups through the “valley of death” between concept and revenue:
* source Osawa and Miyazaki, 2006
By offering generous tax incentives especially for experienced investors, the Australian government is hoping to facilitate more successful startup innovation companies.
What is included in the tax incentives for investors:
- a 20 per cent tax offset on amounts invested in qualifying ESICs, capped at $200,000 per investor per year for sophisticated investors and $50,000 per investor per year for others.
- a 10-year exemption on capital gains tax for investments held as shares in an ESIC for at least 12 months, provided that the shares held are not more than 30% interest in the company.
So what makes an Early stage innovation company? ( ESIC )
To qualify as an ESIC the company must be both Early stage and Innovation. These are assessed as two limbs;
Limb 1: Early stage test requirements
- Must be incorporated or registered in the Australian Business registrar;
- Total expenses of less than 1 Mil in the previous income year (This is for the company plus any wholly-owned subsidiaries of the company);
- Total INCOME for the company plus any wholly owned subsidiaries needs to be 200K or less in the previous year;
- The company must not be listed on any stock exchange (Australian or foreign).
Limb 2 – Assessing as an innovation company
There are two ways to self-assess this:
- The “Gateway test” or 100 point innovation test (this is the most straightforward).
- The principles-based innovation test (this is subject to a ruling from the ATO).
How do you Qualify for the incentives as an investor?
To qualify, investors must have purchased the shares in an ESIC qualified company immediately after the shares issue. If the company stops being an ESIC after the purchase, the investor is still entitled to the tax incentives.
A few things to note:
- The shares must be newly issued.
- The shares must hold equity interest in the ESIC.
- You cannot be a “widely held company.”
- You must have $50,000 or less invested in one or more ESIC’s for the income year. If you are a sophisticated investor you can invest as much as you like, however, the tax offset is capped at $200,000 for each income year. (The ATO does not want inexperienced investors overextending into risky early stage investments).
- You can’t be an affiliate of the ESIC.
- You can’t hold more than a 30% of the equity interest in the ESIC.
- You can’t claim for shares acquired under an employee share scheme.
For assistance in navigating the requirements for this tax incentive as either an ESIC or a potential investor contact us today.
