Did you know that qualified companies may use tax incentives to attract capital investment as part of their investment strategy?
If you qualify as an early stage innovation company (ESIC), your investors may be eligible for tax incentives as early stage investors (sometimes referred to as angel investors).
The tax incentives available to your eligible investors include:
- Exemption from Capital Gains Tax (CGT) can occur upon disposal of their investment in your company for the first 10 years (the shares must have been held for at least 12 months prior to disposal).
- Cost base uplift to the shares’ market value 10 years after acquisition for shares that have been held for more than 10 years.
- 20% non-refundable carry-forward tax offset and/or capped at $200,000 for each investor, assessed each income year.
Are you an Early Stage Innovation Company (ESIC)?
An ESIC is a company that is in the early stages of developing an innovative product or service.
Your company should qualify as an ESIC where the requirements set out in the following tests are met:
- Early stage test; and
- 100-Point Innovation Test or Principles-Based Innovation Test.
Early stage test
This test is used to determine whether your company is genuinely in the early stages of business as evidenced by its incorporation date and income and expenditure thresholds.
Your company will meet the requirements of the early stage test if:
- It was incorporated in Australia within the last 3 income years or incorporated in Australia within the last six income years and across the last three of those years, the company and its subsidiaries had total expenses of $1 million or less
- It has incurred expenses of $1 million or less in the previous income year (including expenses of any wholly owned subsidiaries)
- It has derived an assessable income of $200,000 or less in the previous income year (including the assessable income of any wholly owned subsidiaries) and
- Its shares are not listed on any stock exchange
100-Point Innovation Test
To meet the requirements of the 100-point innovation test your company must accumulate 100 points by meeting certain objective innovation criteria as tested immediately after your investor has been issued shares in your company.
These points are awarded in different quantities according to the following criteria:
- Your company has incurred eligible research and development tax incentive expenses that meet or exceed certain thresholds
- Your company has received an Accelerating Commercialisation Grant under the Commonwealth’s Entrepreneurs’ Programme
- Your company is undertaking or has completed an eligible accelerator program
- An eligible third party has previously invested at least $50,000 in your company in return for shares
- Your company holds eligible intellectual property rights, either in Australia or internationally
- Your company has a collaborative agreement with a research institution or a university to commercialise the innovation
- Your company satisfies any additional criteria prescribed under regulations (if any)
Principles-Based Innovation Test
If your company does not meet the requirements of the 100-point innovation test your company may still qualify as an ESIC where it meets the requirements of the principles-based innovation test.
To meet the requirements of the principles-based innovation test your company must demonstrate that it meets the following five requirements:
- It is genuinely focused on developing for commercialisation one or more new (or significantly improved) innovations for commercialisation
- It has genuine high growth potential in relation to those innovations
- It has the potential to scale up
- It has the potential to address a market larger than the local market, including global markets and
- It has competitive advantages.
You must be able to demonstrate how your company meets each of the abovementioned requirements using existing documentation such as a business plan, commercialisation strategy or competition
We can assist you to:
- Determine whether your company is considered an ESIC
- Provide documentation for you to provide to potential investors regarding your ESIC status
- Determine whether your investors are eligible for the tax concessions.
The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.
For more info and to get in touch with the team, please visit the Gild Legal page.