What is the Tax Incentive for Early Stage Investors?

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

Tax Incentive for Early Stage Investors - Quick Guide

Independent preparation of the principles-based innovation test

 

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.

 

What is an early stage innovation company?

A company will qualify as an ESIC if it meets both:

  1. the early stage test
  2. 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

 

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:

  1. Incorporated – Must be a a company or a registered business (ABR)
  2. Expenses –  The company must have total expenses of  less than $1 million
  3. Income – The company must have assessable income of  less than $200k
  4. Listed – the company is not listed