If you are thinking about investing, looking to invest, or have already invested in an Australian start-up, you may or may not be aware of what incentives are available to you..
On July 1, 2016, the government provided two new tax incentives to encourage investments in Australian start-ups who qualify as Early Stage Innovation Companies (ESIC).
What is an ESIC? – As outlined by the ESIC Directory.
An ESIC is an Early Stage Innovation Company.
For a company to qualify as an ESIC it must:
- Display potential for high growth.
- Have the ability to scale
- Have a broad reach beyond the local market
- Have competitive advantages.
From the ATO “Tax Incentives for Early Stage Investors” post:
The tax incentives provide eligible investors who purchase new shares in an ESIC with a:
- Non-refundable carry forward tax offset equal to 20% of the amount paid for their qualifying investments. This is capped at a maximum tax offset amount of $200,000 for the investor and their affiliates combined in each income year.
- Modified capital gains tax (CGT) treatment, under which capital gains on qualifying shares that are continuously held for at least 12 months and less than ten years may be disregarded. Capital losses on shares held less than ten years must be disregarded.
How to qualify for the tax incentives
In order to qualify, investors need to have purchased new shares in a company that meets the requirements of an ESIC as soon as the shares have been issued. Once a company has met these requirements, it will no longer be recognised as an ESIC.
This will not impact the investor’s entitlement to the early stage investor tax incentives for their shares.
You will not qualify if:
- you didn’t purchase the shares in the ESIC directly from the company as newly issued shares
- the shares are not equity interests in the ESIC
- you are a widely held company or a wholly-owned subsidiary of a widely held company.
- your total investment in one or more ESICs for the income year is more than $50,000 and you didn’t meet the sophisticated investor test in relation to at least one of those share offerings
- you or the ESIC are affiliates of each other at the time the shares are issued.
- you hold more than 30% of the equity interests in the ESIC (including any entities connected with the ESIC) immediately after you are issued with the new shares.
- you acquired the shares under an employee share scheme.
The ESIC tax incentives are available to both Australian and non-Australian resident investors.
“Investors that don’t meet the sophisticated investor test will not be eligible for any tax incentives if their total investment in qualifying ESICs in an income year amounts to more than $50,000.”
Am I a sophisticated investor?
Investors that don’t meet the sophisticated investor test will not be eligible for any tax incentives if their total investment in qualifying ESICs in an income year amounts to more than $50,000.
You qualify as a sophisticated investor if:
- 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.
- 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 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).
Not a sophisticated investor – How will I be limited?
If you’re not a sophisticated investor, 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 will apply to all of the shares that was issued to you during that income year, including to the amount of your investments that are below $50,000.
For more information about tax incentives, visit the ATO’s post. click here.
For more information on why to invest and how, go to the ESIC Directory.
Ken Bond – Director
Ken is a certified taxation advisor and joined Fitzpatrick Group in 2006 after 31 years with one of Australia’s largest banks, where he held a variety of management positions from Branch Manager to Senior Business Banking Manager.