What You Need to Know About Tax Incentives for Early Stage Investors

tax-incentives-for-early-stage-investorsUnder the National Innovation and Science Agenda (NISA), the Australian Government is encouraging innovation by aligning business laws and our tax system with a culture of entrepreneurship and risk-taking. As a way of attracting investors to early stage innovation companies, from 1 July 2016 the Government has provided some attractive tax incentives for investors.

So, what exactly is an early stage innovation company or ESIC? Well, an ESIC is a new company that has developed new products or services, such as a startup, with the potential for high growth. From 1 July 2016, tax incentives will provide eligible investors with:

  • a non-refundable carry forward tax offset that is equal to 20% of the amount paid for their qualifying investments, which is capped at a maximum tax offset of $200,000 per investor per year
  • a ten year capital gains tax exemption for investments held as shares in an ESIC for at least 12 months, provided the shares held do not exceed a 30% investment in the ESIC

According to the ATO, ESIC companies are deemed as qualifying if, at the time of investment, they:

  • were incorporated in Australia within the last three years although, in some circumstances this can be within the last six years
  • had expenditure of $1,000,000 or less in the previous financial year
  • had assessable income under $200,000 in the previous financial year
  • are not listed on any stock exchange
  • are involved in innovation by satisfying either the principles based test or gateway test through self assessment or, has received a determination from the ATO

For an investor to qualify for the tax incentives they must:

  • invest in a qualifying ESIC, as described above
  • not be a widely held company
  • be a sophisticated investor, or
  • be a non-sophisticated investor with an investment of $50,000 or less in the income year

With the introduction of these tax incentives, it is in the best interests of all ESIC’s to ensure that they are ESIC ready. This vital step early on will ensure that new companies will be able to capitalise on new investors to the marketplace.

Do you have any questions regarding ESIC? Contact us for further information.