The Early Stage Innovation Company legislation offers significant taxation benefits to eligible investors.
To make Early Stage Innovation Companies work there has to be investors. Investors can qualify for two major tax incentives:
- the 20% tax offset – which is available for sophisticated investors – up to $200,000 and for retail investors up to $10,000; and
- the capital gains tax exemption – which is available to investors from the end of the first twelve months of their investment to the end of nine years.
Sophisticated investors are people who have had their accountant prepare a statement to the effect that their net worth is over $2.5M and their assessable income for the last two years has exceeded $250,000.
For companies to qualify as an ESIC they need to have passed two out of three tests.
The first test, which we’ve called the Provisional Test, relates to whether the company is less than three years old; however in some instances companies aged up to six years old can be eligible to be classified as an ESIC. The company’s expenditure in the previous income year (2015/16) must be under $1M and the company’s assessable income in that year has to be under $200,000 excluding any amount of grant income received under the Accelerating Commercialisation Grant Program. Also, the company cannot be listed on a Stock Exchange anywhere in the world.
Having passed the Provisional Test, the company should then proceed to assess itself under the Gateway Test. Under the Gateway Test, the company needs to earn at least 100 points. If the company has earned 100 points or more and they have maintained the records, as part of the substantiation of that, then they have self-assessed themselves as being an ESIC.
If the company is unable to satisfy the requirements of the Gateway Test, they can then move onto the Principles-Based Test. Ultimately the final arbitrator of whether the company is an ESIC is going to be the Australian Taxation Office in conjunction with AusIndustry, but many companies will be trying to get investors to invest at an early stage; in some instances prior to the ATO giving their formal answer.
It’s very important that you have received appropriate professional advice on this entire journey and something with which OBT can help.