The Tax Incentive for Early Stage Investors is available for startup investors to stimulate investments in small innovative companies.

Tax Incentive for Early Stage Investors - Quick Guide

Independent preparation of the principles-based innovation test

 

Tax Incentive for Early Stage Investors

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:

  • a 20% non-refundable tax offset on investments, capped at $200,000 per investor per year
  • a 10 year exemption on capital gains tax, provided investments are held for three years

 

Background

The Tax Incentive for Early Stage Investors for early stage investors have come into effect from 1 July 2016. The tax incentives for early stage investors (sometimes referred to as ‘angel investors’) are contained in Division 360 of the Income Tax Assessment Act 1997.

The early stage investor tax incentives are available to both Australian resident and non-resident investors.

If the investor is a trust or partnership, special rules apply so that the entitlement to the tax offset flows through to the member of the trust or partnership (or the ultimate member if there is a chain of trusts or partnerships).

If the investor is a superannuation fund, the trustee of the fund and not the fund members, would be entitled to the tax incentives (tax offset and the modified CGT treatment).

 

Eligibility

To qualify for the Tax Incentive for Early Stage Investors, investors must have purchased new shares in a company that meets the requirements of an ESIC immediately after the shares are issued. The shares must be issued on or after 1 July 2016. If, after the company has satisfied these requirements, it ceases to be an ESIC, this won’t affect the investor’s entitlement to the early stage investor tax incentives for the shares.

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

  • the early stage test and
  • either the
    • 100-point innovation test or
    • principles-based innovation test.

To be eligible for the Tax Incentive for Early Stage Investors, an investor must meet the ‘sophisticated investor’ test under the Corporations Act 2001 or, if the investor does not meet this test, their total investment in qualifying companies must be $50,000 or less for that income year.

The Tax Incentive for Early Stage Investors will be available for investments where the company is:

  • early stage, determined against criteria related to expenditure, assessable income, stock exchange listing and incorporation.
  • involved in innovation, determined by allowing the company to self‑assess against either a principles-based test or a points-based gateway test, or by receiving a determination from the Australian Tax Office

If you don’t meet the sophisticated investor test in relation to at least one offer of qualifying shares in an ESIC during the income year, there is a limit on the total amount that you can invest to access the tax incentives.

In such a case, your investments in one or more qualifying ESICs in an income year must not exceed $50,000 in total. If your total investments exceed $50,000, you won’t be eligible for either:

  • the early stage investor tax offset for any of your investments in that income year
  • the modified CGT treatment for any of your investments in that income year.

This applies to all of the shares that were issued to you in that income year, including to the amount of your investments that are below $50,000.

 

Early stage test requirements

To meet the early stage test for the Tax Incentive for Early Stage Investors, the company must meet four requirements:

1. The company must have been incorporated or registered in the Australian Business Register

Under this requirement, the company must have been either:

  • incorporated in Australia
  • registered in the Australian Business Register (ABR)

within the last three income years (the latest being the current income year in which the requirement is tested).

If neither of these apply, both of the following requirements must be met:

  • the company was incorporated in Australia within the last six income years (the latest being the current income year at the test time)
  • the company and its wholly-owned subsidiaries had expenses of $1 million or less across the last three of those income years.

2. The company (plus any wholly-owned subsidiaries of the company) must have total expenses of $1 million or less in the previous income year.

3. The company (plus any wholly-owned subsidiaries of the company) must have assessable income of $200,000 or less in the previous income year.

4. The company’s equity interests are not listed for quotation in the official list of any stock exchange, either in Australia or a foreign country.

These requirements are tested at the point in time immediately after the company issues the shares to the investor. If a company doesn’t meet all of the requirements at that time, the investor won’t qualify for the tax incentives in relation to those shares.

Independent preparation of the principles-based innovation test

 

100-point innovation test requirements

To qualify under the 100-point innovation test under the Tax Incentive for Early Stage Investors, the company must obtain at least 100 points by meeting certain objective innovation criteria. This is tested immediately after the relevant shares are issued to the investor (the test time).

If a company doesn’t meet either the 100-point innovation test or principles-based innovation test at the test time, the shares issued to the investor will not qualify for any early stage investor tax incentives.

Points Criteria
75 points At least 50% of the company’s total expenses for the previous income year are eligible notional deductions for the research and development tax incentive.
75 points The company has received an Accelerating Commercialisation Grant at any time. The amount of this grant is also excluded from the company’s assessable income for the purposes of the early stage test.
50 points At least 15% but less than 50% of the company’s total expenses for the previous income year are eligible notional deductions for the research and development tax incentive.
50 points The company has completed or is undertaking an eligible accelerator programme that provides time-limited support for entrepreneurs with a start-up business. This support may involve providing mentorship, training, education and access to networks.

The programme must be provided to entrepreneurs that are selected in an open, independent and competitive manner. It is likely that an entity that has been selected through this process would also meet the principles-based test.

The entity providing the programme has to have been providing eligible programmes for at least six months, and the programmes must have been completed by at least one cohort of entrepreneurs.

50 points One or more third parties have previously paid a total of at least $50,000 for the issue of new shares in the company.

These points are only available if:

  • the third party was not an associate of the company immediately before it was issued with the shares.
  • the company issued the third party with the shares at least one day before the test time
  • the third party did not purchase those shares primarily to assist another entity to become entitled to early stage investor tax incentives

Examples of entities that would be an associate of a company include:

  • a partner of the company or a partnership in which the company is a partner
  • a trustee of a trust estate under which the company or associate benefits
  • another entity (including a person) that, acting alone or with another entity or entities, sufficiently influences the company
  • an entity (including a person) that, either alone or together with associates, holds a majority voting interest in the company
  • a second company that is sufficiently influenced by the company or the company’s associates
  • a second company in which a majority voting interest is held by the company or the company’s associates.

 

50 points A company has enforceable rights on an innovation through either:

  • a standard patent granted in Australia in the last five years
  • a plant breeder’s rightthat has been granted in Australia in the last five years
  • an equivalent intellectual property right granted in another country.

A company that holds a license to intellectual property owned by another party is able to obtain these points.

25 points A company has enforceable rights on an innovation through either:

  • an innovation patent granted in Australia in the last five years
  • design rightExternal Link granted in Australia in the last five years
  • an equivalent intellectual property right granted in another country.

A company that holds a license to intellectual property owned by another party is able to obtain these points.

These points are only available if the company did not receive 50 points for holding a standard patent, plant breeder’s right or equivalent right overseas under the previous criterion.

25 points The company has a written agreement to co-develop and commercialise an innovation with either:

  • an institution or body listed in Schedule 1 to the Higher Education Funding Act 1988
  • an entity registered as a Research Service Provider under section 29A of the Industry Research and Development Act 1986.

 

 

The “sophisticated investor” test

Under the Corporations Act 2001, ‘sophisticated investors’ who meet certain requirements don’t have to be provided with a disclosure document, such as a prospectus or product disclosure statement, when being offered shares in a company.

You may be a sophisticated investor if, for example:

  • you hold a certificate issued by a qualified accountant that confirms you meet certain asset and income requirements and the certificate is provided no more than six months prior to the qualifying shares being offered to you. At the time of publication, this certificate is available only if you have gross income of at least $250,000 for each of the last two financial years and net assets of at least $2.5 million
  • you have paid at least $500,000 for the qualifying shares (either as a single offer or including any amounts you previously have paid for shares of the same class that you hold in the same company)
  • you are offered the qualifying shares through a financial services licensee who is satisfied that you have previous investment experience that allows you to assess the offer and you sign a written acknowledgement that the licensee hasn’t given you a disclosure document in relation to the offer
  • you meet the requirements of being a ‘professional investor’ under the Corporations Act 2001 (such as a financial services licensee)
  • you have or control gross assets of at least $10 million (including any assets held by an associate or a trust that you manage).

A sophisticated investor whose investments qualify for the early stage investor tax incentives is not restricted as to the amount that they can invest in an ESIC in an income year. However their early stage investor tax offset is capped at a maximum amount of $200,000 for each income year.

 

 

Principles-based innovation test requirements

There are five requirements of the principles-based innovation test.

  • 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 company must demonstrate that it has the potential to be able to have competitive advantages for that business.

 

Early Stage Innovation Company 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 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 company held by the investor immediately after the shares were issued.

Independent preparation of the principles-based innovation test

 

Timing

The deadline for submissions is 31 July 2018

 

More Information

2018-09-13T09:20:39+00:00August 21st, 2018|