Unravelling the complexities of Early Stage Innovation Company (ESIC) investing

October 31, 2023

Early Stage Innovation Company (ESIC)

Early Stage Innovation Companies can access tax incentives to attract investment

Tax incentives are available to encourage investment in Early Stage Innovation Companies (ESIC). Although this type of investment can provide access to tax incentives, investing in an ESIC requires careful thought and preparation. Keep reading to learn more.

Investing in Early Stage Innovation Companies can be a rewarding opportunity, not only in terms of potential returns but also due to the attractive tax incentives offered by the Australian government.  

What is an Early Stage Innovation Company (ESIC)? 

An Early Stage Innovation Company (ESIC) is an Australia-based company that is registered as an innovation company. These companies are focusing on both local and global markets and have notable competitive advantages.  

Investing in an Early Stage Innovation Company can offer these investors attractive tax incentives called the Early Stage Investor Tax Offset

 

How to assess if a company is an Early Stage Innovation Company (ESIC)

To be considered an Early Stage Innovation Company they must register as an innovation company and pass certain tests. Registering as an ESIC is beneficial to the company as this attracts investors with large sums of money.  

The company must undergo the early stage test and meet either the 100-point innovation test or the principles-based innovation test. Investors must determine whether the company is an ESIC or not on their own.  

Requirements for a company to pass the first test – Early Stage Test

  1. The company needs to be incorporated or registered in the Australian Business Register
  2. The company (plus any subsidiaries) must have a total of $1 million in expenses or less in the previous income year 
  3. The company (plus any subsidiaries) must have an assessable income of $200,000 or less in the previous income year
  4. The company’s equity interests are not listed on any stock exchange 

If a company passes the Early Stage test it must pass either the Principles-Based Innovation Test or the 100-Point Innovation Test next.  

Principles-Based Innovation Test and the 100-Point Innovation Test

The Principles-Based Innovation Test has 5 requirements, while for the 100-Point Innovation Test the business must collect 100 points by meeting the specified criteria. Both of these tests can be found on the ATO’s website here: Qualifying as an early stage innovation company

 

Eligibility of an investor to receive the Early Stage Investor Tax Offset

  1. Investors must have purchased new shares in a company that meets the requirements of an ESIC immediately after the shares are issued
  2. Investors who are not Sophisticated Investors won’t be eligible for any tax incentives if their total investment in qualifying ESICs in an income year is more than $50,000
  3. Sophisticated Investors maximum tax offset amount is $200,000 for the investor and their affiliates combined in each income year
  4. You and the Early Stage Innovation Company must not be affiliates of each other at the time shares are issued
  5. You must not have acquired the shares under an employee share scheme
  6. Immediately after receiving new shares, you do not hold shares which entitle you to more than 30% of the total voting power or the right to receive more than 30% of any distribution of income or capital by the ESIC company

 

Benefits of investing in an Early Stage Innovation Company (ESIC) 

Investing in an ESIC can provide the following tax incentives to individual investors.  

Investors are eligible for a non-refundable carry-forward tax offset equal to 20% of the amount paid for their eligible investments. This is known as the early stage investor tax offset. The tax offset is capped at a maximum of $200,000 for the investor and their affiliates combined in each income year.  

Modified capital gains tax (CGT) treatment – if there are capital gains on qualifying shares held continuously for at least 12 months and less than 10 years, they may be disregarded. This means if you invest in a qualified Early Stage Innovation Company (ESIC) and acquire shares there is no capital gains tax if sold during this period.  

 

How can I claim the Early Stage Investor Tax Offset?   

Claiming the Early Stage Innovation Company Investor Tax Offset can be a great way to reduce your tax liabilities. You can claim this tax offset in your income tax return.  

If you do not use all your tax offset in that year, you can always carry it forward for use in future income years.

When you apply for ESIC tax offset, make sure you do it after any other tax offsets for that year that cannot be carried forward to receive the most benefits

 

How we can help

If you are feeling overwhelmed with the whole idea of ESIC (How do I assess if a company is an Early Stage Innovation Company? How much is my Early Stage Investor Tax Offset? How do I claim the tax offset?) don’t worry, you aren’t alone!  

At Pretium Solutions, we can help you with navigating through all these complexities, making it simple and easy for you. Contact us today to get started.

Learn more about funding, grants and Research & Development (R&D) in our blog:

 

 

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