Are You Entitled to the ESIC Tax Incentives?

For all Australians, it is tax time again. And for investors in startups, there might be times you come across an offer document that mention something called ESIC tax incentives which stands for early stage innovation company tax incentives. According to the Income Tax Assessment Act 1997, if you invest in a qualifying early stage innovation company (ESIC), you may be eligible for some tax incentives for early stage investors.

So, what are the tax incentives?

  1. A non-refundable carry forward tax offset equal to 20% of the amount paid for eligible investments. This is capped at a maximum tax offset amount of $200,000 for the investor in each income year.

    For example, if you invest $2,000,000 in a startup qualified as an ESIC, then you are entitled to 20% of non-refundable carry forward tax offset = 20% x $2,000,000 = $400,000. Assuming that you are required to pay a tax amount of $50,000 in the year, you can then offset the required tax payment with your non-refundable carry forward tax offset of $400,000, in which case you don’t have to pay the tax amount or can have them returned. After the tax offset of $50,000 is used, you will have a remaining non-refundable carry forward tax offset of $400,000 – $50,000 = $350,000 that you can carry forward to the following year.

  2. A modified capital gains tax (CGT) treatment, under which capital gains on qualifying investments that are continuously held for at least 12 month and less than 10 years may be disregarded.

    For example, if you invest $500,000 in a startup qualified as an ESIC, and 5 years later (the condition is > 12 months and < 10 years) you exit the investment and sold your shares for $1,000,000. You will not be required to pay capital gains tax on the $500,000 capital gain that you get from selling the shares.

Are the startups I am investing in considered ESICs?

The best way is to reach out to the companies you invested in to check if they qualify as an early stage innovation company (ESIC). Typically, a company will qualify as an ESIC if it is not a foreign company under the Corporations Act 2001 and meets both:

  1. The early stage test
  2. Either the:

In practice, if a company undertakes activities that meet the 100-point innovation test, this is likely to be the simplest way to determine its eligibility, when compared to the principles-based innovation test. The 100-point test is an objective test and should be self-assessed.

Who is eligible for the tax incentives?

Investors who don’t meet the sophisticated investor test won’t be eligible for any tax incentives if their total investments in qualifying ESICs in an income year is more than $50,000. Otherwise, all investors will be eligible for the above tax incentives.

Hopefully you find this useful. Again, please do not assume that all startups you invested in qualify as an ESIC. There could be certain requirements they do not meet that may disqualify them from being an ESIC.

For further information, feel free to visit the official ATO website.

Zoom.. Zoom. Happy Hunting!

The Startup Investigator

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