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 company.

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

 

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

Tax Incentive for Early Stage Investors - Quick Guide

Independent preparation of the principles-based innovation test

 

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.

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 company 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 company 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 company has a standard patent or a plant breeder’s right

To qualify for 25 points:

  • Patent – The company 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.

  1. Commercialisation – be genuinely focused on developing one or more new or significantly improved innovations for commercialisation
  2. Growth Potential – have innovation must have a high growth potential
  3. Capability – has the potential to be able to successfully scale up that business
  4. Export – has the potential to be able to address a broader than local market, including global markets, through that business.
  5. Competitive Advantage – The company 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.

 

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 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 company held by the investor immediately after the shares were issued.

Tax Incentive for Early Stage Investors - Quick Guide

Independent preparation of the principles-based innovation test

 

 

Do you need an ESIC ATO Ruling?

If you dont meet the 100 point test, you dont need an ATO ruling to establish their ESIC status.

Just go for the principles-based innovation test 

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