The program helps startups to get capital by giving investors tax breaks when they get equity in small innovative companies.
It gives investors:
- Tax offset – a 20% non-refundable tax offset on investments, capped at $200,000 per investor per year
- Capital Gains – a 10 year exemption on capital gains tax, provided investments are held for three years
Background
The Tax Incentive for Early Stage Investors, an initiative by the National Innovation and Science Agenda, to promote investment in innovative, high-growth potential startups by providing concessional tax treatment for investors, including:
What is an early stage investor?
An early stage investor must meet either the:
- ‘sophisticated investor’ test under the Corporations Act 2001 or,
- their total investment in ESIC must be $50,000 or less for that income year.
What is a sophisticated investor?
A sophisticated investor has:
- Income – had a gross annual income of $250,000 or more in each of the previous two years or
- Assets – has net assets of at least $2.5 million
Under the Corporations Act 2001, ‘sophisticated investors’ don’t have to be provided with a prospectus or product disclosure statement, when being offered shares in a ESIC.
A sophisticated investor is not restricted as to the amount that they can invest in an ESIC in an income year but the tax offset is capped at a maximum amount of $200,000 for each income year.
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What is an early stage innovation company?
A company will qualify as an ESIC if it meets both:
- the early stage test
- 100-point innovation test or principles-based innovation test
What is an ESIC?
An ESIC or Early Stage Innovation Company, is a start-up that has less than $200,000 in revenue and less than $1 million in expenses. It also has level of innovation and high growth potential.
What is an early stage investment company?
An early stage investment company is the same as an Early Stage Innovation Company or ESIC. It is a start-up that has less than $200,000 in revenue and less than $1 million in expenses. It also has level of innovation and high growth potential.
What is early investor tax offset?
The early investor tax offset is equal to 20% of the total amount paid in return for the qualifying shares upt to $200,000 in an income year. This includes any offsets that are carried forward from prior years’ investments and offsets claimed on indirect investments.
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Early Stage Investor Tax Offset – Worked Example
John, a sophisticated investor, pays $4 million for new shares in ESICs during the 2016–17 income year.
Although 20% of the total amount John has paid for the ESIC shares is $800,000, her entitlement to the early stage investor tax offset is capped at $200,000 (provided the other eligibility requirements for the incentives are met).
John has an income tax liability of $50,000 for the 2016–17 income year. He uses $50,000 of the early stage investor tax offset to reduce his tax payable to zero. John can carry forward the remaining $150,000 in early stage investor tax offset to future income years.
The modified CGT treatment applies to all of the shares that she purchased.
How do I find investors for my startup?
There are a number of ways to get investors for your start up including. Here are some tips I have put together.
Will investors invest in an idea?
Very rarely. They are generally after a company/people with a track record of some description; whether it be industry knowledge, market opportunity, commercialisation experience, user growth rate or current sales.
The Early Stage Test
To meet the early stage test for the Tax Incentive for Early Stage Investors, the ESIC must meet four requirements:
- Incorporated – Must be a a company or a registered business (ABR)
- Expenses – The company must have total expenses of less than $1 million
- Income – The company must have assessable income of less than $200k
- Listed – the company is not listed
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100 Point Innovation Test
There are a number of ways to qualify for the 100 Point Innovation Test to get the early stage investor tax offset.
The 100-point test is an objective test and should be self-assessed.
To qualify for 75 points:
- R&D Tax Incentive – At least 50 % of the expenses of previous income year are an eligible notional deduction for the R&D tax incentive.
- Accelerating Commercialisation – The ESIC has received an accelerating commercialisation grant.
To qualify for 50 points:
- R&D Tax Incentive – At least 15 % of the expenses of previous income year are an eligible notional deduction for the R&D tax incentive.
- Accelerator Program – The ESIC has participated in an eligible accelerator program
- New Shares – Investors have previously paid more than $50,000 for the issue of new shares.
- Patent – The ESIC has a standard patent or a plant breeder’s right
To qualify for 25 points:
- Patent – The ESIC has an innovation or design right
- Collaboration – an agreement with a research institution to co-develop and commercialise an innovation.
Principles Based Innovation Test
There are five requirements of the principles-based innovation test to get the early stage investor tax offset.
- Commercialisation – be genuinely focused on developing one or more new or significantly improved innovations for commercialisation
- Growth Potential – have innovation must have a high growth potential
- Capability – has the potential to be able to successfully scale up that business
- Export – has the potential to be able to address a broader than local market, including global markets, through that business.
- Competitive Advantage – The ESIC must demonstrate that it has the potential to be able to have competitive advantages for that business.
What is Eligible Accelerator Programme?
For an eligible accelerator programme to qualify for theearly stage investor tax offset, it has to:
- Support – provides start ups with mentorship, training, education and access to networks.
- Competitive – that is an open, independent and competitive manner.
- Track Record – The entity providing the programme has a track record of entrepreneurs.
What is R&D tax incentive?
The R&D tax incentive is a rebate you get for developing new products and services. It allows you to claim back up to 43.5% of the costs related to research and development.
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What is seed stage investment?
Seed investment generally refers to an early investment after the company has been bootstrapping for a while. Look to friends, family, angel investors and crowdfunding as potential avenues for seed stage investment.
Early Stage Innovation Company ESIC Report
Companies are required to complete an early stage innovation company report if they issue new shares to one or more investors during a financial year that could lead to an investor being entitled to access the early stage investor tax incentives.
For each ESIC investment that you receive during the year that may give rise to an investor accessing the tax incentives, you should keep the following information to report to us:
- ABN, name and address for the investor (plus the date of birth for investors that are individuals)
- number of new shares issued to the investor
- amount paid for the new shares
- date the shares were issued
- percentage of shares in the ESIC held by the investor immediately after the shares were issued.
What is an ESIC ATO Ruling?
A company can request the ATO make a ruling on whether it qualifies as an ESIC against the principles-based innovation test.
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Do you need an ESIC ATO Ruling?
If you dont meet the 100 point test, you don’t need an ATO ruling to establish your ESIC status.
Just go for the principles-based innovation test
ESIC ATO Form
In the ATO Business Portal, go to online forms and complete the Early stage innovation company report.
You will need to describe the company innovation information with a 1500 Character limit.
You will also need to include the investor details:
- Investor – ABN, name, address and date of birth for the investor
- Allocation – number of new shares issued to the investor
- Price – amount paid for the new shares
- Timing – date the shares were issued
- Equity – percentage of shares in the company held by the investor immediately after the shares were issued.
Early Stage Innovation Company Register
Bulletpoint maintains an ESIC Register if you are looking for high growth start ups to invest in. Contact us to discuss further.
More Information
Frequently Asked Questions
The Early Stage Investors Tax Offset is a tax incentive program in Australia aimed at encouraging investment in qualifying early stage innovation companies (ESICs), particularly startups with high growth potential.
The early stage investor tax offset is generally equal to 20% of the total amount paid (including non-cash benefits) in return for the qualifying shares. Investors and their affiliates are entitled to a maximum offset of $200,000 in an income year.
The “T8 Early Stage Investor” tax offset in Australia is an incentive for investors backing early-stage innovation companies. It allows them to claim up to $200,000 in tax offset by investing in eligible shares, with the calculation being 20% of the total investment, considering any carried forward amounts.
Tax incentives for early stage investors in Australia aim to promote investment in early stage innovation companies (ESICs). Eligible investors can benefit from a 20% non-refundable tax offset on investments in ESICs, reducing their income tax liability. Additionally, they may qualify for a 10-year exemption from capital gains tax (CGT) on the sale of ESIC shares held for at least 12 months. To qualify, ESICs must meet specific criteria related to their early-stage and innovation activities. The maximum tax offset is $200,000 per investor per year on an affiliate-inclusive basis.
An Early Stage Innovation Company (ESIC) is a company typically in its early stages of development that engages in innovative activities. ESICs focus on creating new or significantly improved products, services, processes, or marketing and organisational methods with high growth potential. These companies should demonstrate the capacity to scale their business successfully, address broader markets, including global ones, and possess competitive advantages in their field. ESICs are not listed on any stock exchange and must meet specific incorporation criteria, such as age and Australian Business Number (ABN) status.
To qualify as an Early Stage Innovation Company (ESIC) in Australia, a company must meet specific criteria immediately after new shares are issued to an investor. These criteria are as follows:
Not a Foreign Company: The company must not be considered a foreign company under the Corporations Act 2001.
Early Stage Test: The company must meet the early stage test, which includes:
a. Being incorporated or registered in the Australian Business Register (ABR). b. Having total expenses of $1 million or less in the previous income year. c. Having assessable income of $200,000 or less in the previous income year. d. Not having equity interests listed for quotation on any stock exchange in Australia or a foreign country.
Incorporation or ABR Registration: The company should have been incorporated in Australia or registered in the ABR within the last three income years. Alternatively, if not incorporated or registered within the last three income years, it must meet additional criteria, including being incorporated in Australia within the last six income years and having expenses of $1 million or less across the last three income years.
Total Expenses: The company (including its wholly-owned subsidiaries) must have total expenses of $1 million or less in the previous income year.
Assessable Income: The company (including its wholly-owned subsidiaries) must have assessable income of $200,000 or less in the previous income year. Companies with no assessable income in the previous year may still meet this requirement.
Not Listed on Stock Exchange: The company’s equity interests must not be listed for quotation on any stock exchange, either in Australia or a foreign country.
In addition to the early stage test, a company can also qualify by meeting the 100-point innovation test. To pass this test, the company must accumulate at least 100 points by meeting specific objective innovation criteria. This test is conducted immediately after the relevant shares are issued to the investor.
To determine if a company is an Early Stage Innovation Company (ESIC) in Australia, you must assess whether it meets specific criteria:
Early Stage Test: Check if the company:
- Was incorporated or registered in the Australian Business Register (ABR) in the last three income years.
- Had total expenses of $1 million or less in the previous income year.
- Had assessable income of $200,000 or less in the previous income year.
- Is not listed on any stock exchange, either in Australia or a foreign country.
Incorporation or ABR Registration: If the company wasn’t incorporated or registered in the last three income years, it may still qualify if it meets additional criteria, like being incorporated in Australia within the last six income years and having expenses of $1 million or less across the last three income years.
100-Point Innovation Test: Alternatively, check if the company accumulates at least 100 points by meeting specific objective innovation criteria immediately after issuing shares to investors.
ATO Ruling: Some companies may seek an official ruling from the Australian Taxation Office (ATO) to confirm ESIC status under the principles-based innovation test.
Investors are typically responsible for confirming ESIC eligibility, so keeping thorough records and seeking professional advice, if needed, is crucial.
Investing in early stage companies, particularly Early Stage Innovation Companies (ESICs) in Australia, offers several advantages. These include tax incentives, potential for high returns due to their high growth potential, diversification of investment portfolios, active participation in entrepreneurship, and support for innovation and economic growth. Early stage investments can also bridge funding gaps for startups and provide access to cutting-edge technologies. However, it’s important to be aware of the associated risks and conduct thorough due diligence before investing in early stage ventures.
Want to chat about the R&D tax incentive?
You may find it useful to schedule a chat to ask any questions you may have like:
- Are you actually doing eligible R&D?
- What is the difference between core and supporting?
- How much can I claim?
- What should my hypothesis be?
- How much should I pay myself?
- How do I put the financials together?
- What if I sell a prototype or get a grant?
- What overhead percentage should I use?
- What should I do when I am reviewed by AusIndustry?
- What records should I show the ATO?
