Early stage innovation companies (ESIC)
Posted by Northadvisory on October 30, 2017
Tax incentives for early stage investors were announced by the government in its National Innovation and Science Agenda on 7 December 2015. The incentives are designed to promote entrepreneurship and innovation, by connecting start-up companies with investors to assist entrepreneurs in developing innovative companies.
Funding is especially needed at the “pre-commercialisation” phase when a concept is being developed and the company requires additional funding to assist with commercialisation. This is often regarded as the high risk period when many start-up companies would be prone to cash flow requirements.
Generally, a company qualifies as an ESIC if it is at an early stage of its development and it is developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return.
The following tests must be satisfied to be an ESIC:
1. At the time of the investment the company was:
a. incorporated in Australia within the last three income years
b. incorporated in Australia within the last six income years and across the last three of those income years it and its 100% subsidiaries (if any) incurred total expenses of $1m or less, or
c. registered with the Australian Business Register within the last three income years
2. the company and its subsidiaries (if any) incurred expenses of $1m or less in the immediately preceding income year
3. the company and its subsidiaries (if any) derived no more than $200,000 assessable income in the immediately preceding income year
4. none of the company’s equity interests are listed on any stock exchange, and
5. the company is undertaking an “eligible business”.
An eligible business will be a business that has at least 100 points under the test in s 360-45, or is a company genuinely focused on developing its new or significantly improved innovation (in the form of products, processes, services or marketing or organisational methods) for the purpose of commercialisation and shows that the business relating to that innovation:
• has the potential for high growth
• has scalability
• can address a broader than local market, and
• has competitive advantages
Investors who acquire shares in an ESIC entity will be entitled to the following tax incentives.
Non-refundable tax offset
A 20% non-refundable tax offset on the purchase price of the shares, provided that:
• the investor is not a widely-held company or a subsidiary of a widely-held company
• the ESIC is not an affiliate of the investor
• the investor does not hold more than 30% of the equity interests in the ESIC after the purchase of the shares, and
• the acquisition of shares does not take place under an employee share scheme.
The total tax offset is limited to a cap of $200,000 in an income year for sophisticated investors, and non-sophisticated investors are limited to a total investment of $50,000.
Capital gains tax exemption
Any investment that qualifies for the non-refundable tax offset will also qualify for capital gains tax concessions, as follows:
• the investor is taken to hold the qualifying shares on capital account
• if the investor holds the qualifying shares held for less than 12 months they may disregard any capital losses
• if the investor holds the qualifying shares for more than 12 months and less than 10 years, they may disregard any capital gains, and
• if the investor holds the qualifying shares for more than 10 years, the cost base of the shares is taken to be the value of the shares on the 10-year anniversary of their acquisition.
Martin van der Saag
T: 02 9984 7774