Tax Incentives for Investments in Early Stage Innovation Companies
The Governments lucrative early investor tax incentive called the Early Stage Innovation Company (ESIC) scheme allow investors to claim non – refundable carry forward tax offsets and exemptions on CGT dependent upon meeting certain criteria.
What is an ESIC?
To qualify as an ESIC there are several criteria that a company must first satisfy. To be eligible for the tax incentives the company must:
- Have been incorporated in Australia within the last 3 income years o This is extended to the last 6 income years if the company and its 100% owned subsidiaries incurred total expenses of $1million or less
- Registered in the Australian Business Register within the last 3 income years
- Have total expenses of $1million or less in the income year before the current year
- Have total assessable income of $200k or less in the income year before the current year
- Have no equity interests listed on an official stock exchange
- Meet the 100-point innovation test or the principles-based innovation test
Who is Eligible?
The tax concessions do come with the caveat that the investments must be made by a sophisticated investor. A sophisticated investor is an investor who has had a gross annual income of $250,000 or more in each of the previous two years or has net assets of at least $2.5 million.
For the investor to be eligible for the tax incentives the investment must satisfy several requirements.
- Trust / Partnerships excluded themselves, though individual members are not
- Widely held companies and their 100% owned subsidiaries excluded
- Equity interest that are shares must have been issued directly from the ESIC. o Preference shares and debt investments are not covered. o Convertible notes can be considered eligible granted that they satisfy the ESIC conditions and that they satisfy such criteria when the notes are converted into shares.
- The company must be an ESIC
- Investor cannot be an affiliate of the company
- Acquisition is not an employee share scheme interest issued under an employee share scheme
- Investor holds ≤ 30% of equity interest in the company and its connected entities
What are the Incentives?
Investors who satisfy the criteria are eligible to receive a non – refundable carry forward tax offset of 20% of the amount paid by the investor in purchasing the shares (this amount is capped at $200k in each income year). An eligible investor is also eligible for an exemption on any capital gains on those shares if they are continuously held for a minimum of 12 months but less than 10 years, the capital loss on such ownership is disregarded granted the shares are held within this period.
If you think you may be an early stage innovation company or are looking to invest in one, contact us for information or assistance in determining eligibility.