The Early Stage Innovation Company (ESIC) tax incentive provides concessional tax treatment for investors in innovative, high-growth start-ups.
As part of this initiative, as of 1 July 2016, if a taxpayer invests in a qualifying ESIC, then they may be eligible for tax incentives.
These tax incentives include:
- 20% non-refundable tax offset on investments, capped at $200k per investor per year; and
- 10 year exemption on capital gains tax, provided investments are held for 12 months
For example, an investor who provides early stage capital of $1m to a business that qualifies as an ESIC according to the the eligibility criteria will receive a $200k tax offset and a 10 year exemption of CGT on the value of the shares in the ESIC business if they are held for more than 12 months.
Company Eligibility Criteria
In order for a company to be considered eligible under the scheme, it must meet all of the criteria below:
a)The company must have been incorporated or registered in the Australian Business Register within the last three years (last six years if additional criteria is met*).
b)The company (plus any wholly-owned subsidiaries) must have total expenses of $1 million or less in the previous income year*.
c)The company (plus any wholly-owned subsidiaries) must have revenue of $0-$200k in the previous income year.
d)The company is not listed on any stock exchange, either in Australia or abroad.
Qualifying as an Early Stage Innovation Company
There are two different tests used to qualify as an ESIC. If a company does not pass the 100-point test, it must rely on the principles-based innovation test.
Primary Test: 100-Point Innovation Test
A company must assess itself against a list of criteria (assigned weighted points) and achieve at least 100 points in order to qualify as an ESIC under this test.
Alternate Test: Principles-Based Innovation Test
A company may choose to either self-assess or request a private binding ruling from the ATO on whether it qualifies as an ESIC. Given the subjective nature of the test, it is recommended a private binding ruling be sought to confirm the company’s view.
We’ve helped companies of all shapes and sizes, from a wide range of industries, achieve ESIC status. Get in touch and we can discuss your needs.