Does your investment qualify for early stage investor tax incentives?

What are the tax incentives for early stage investors?

There are two:

• a 20 % non‑refundable carry-forward tax offset on amounts invested in qualifying ESICs, with the offset capped at $200,000 per investor per year (on an affiliate-inclusive basis); and
• a 10 year exemption on capital gains tax for investments held as shares in an ESIC for at least 12 months, provided that the shares held do not constitute more than a 30 per cent interest in the ESIC.

What are the criteria for tax incentives for early stage investors?

The startup receiving the funding must satisfy two limbs:

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

How do you prove “early stage” ?

The company is in early stage if it:

• had expenditure of  $1,000,000 or less in the prior income year;
• had assessable income of $200,000 or less in the prior income year;
• is not listed on any stock exchange;
• was incorporated in Australia:
  • in the last 3 years; or
  • prior to that but received an Australian Business Number in the last 3 years; or
  • in the last 6 years and total expenditure in the previous three tax returns does not exceed $1 million.

Is your company involved in innovation?

There are couple of tests to determine this:

Principles-based test:

The principles-based test provides guidance to help determine if a company will be an ESIC, through self‑assessment of whether:

• it is genuinely focused on developing for commercialisation one or more new, or significantly improved, products, processes, services or marketing or organisational methods;
• the business relating to those products, processes, services or methods has a high growth potential;
• it can demonstrate that it has the potential to be able to successfully scale that business;
• It can demonstrate that it has the potential to address a broader than local market, including into global markets, through that business; and
• it can demonstrate that it has the potential to be able to have competitive advantages for that business.

Gateway test – must achieve at least 100 points:

The gateway test contains a more objective set of tests to provide additional assistance to identify an early stage innovation company. If a total of 100 points is achieved, the company will be considered an eligible innovation company for the purposes of this measure.

Points will be given for a range of activities including: a company’s level of expenditure on research and development; whether the company has received an Accelerating Commercialisation grant; whether the company is undertaking/completed a genuine accelerator program that supports entrepreneurs; received at least $50,000 from a third-party financial investor; is an applicant on one or more enforceable intellectual property rights on an innovation through a standard or innovation patent; or has a written agreement with a listed/registered entity under the Higher Education Funding Act 1988 or the Industry Research and Development Act 1986.

As this is self-assessment, it is advisable for the investor (not the company, as the investor is the one claiming tax incentives) to apply for a PRIVATE RULING to have a certainty.