An investor in a qualifying Early Stage Innovation Company gets a 20 per cent tax offset on what they put in, capped at $200,000 a year, and pays no capital gains tax on shares held between one and ten years.
Where the R&D Tax Incentive helps a company fund the work, the ESIC concessions make it more attractive for somebody to fund the company in the first place. Both concessions apply automatically once the conditions are met, with nothing to register and nothing to apply for, which puts all the weight on getting the assessment right and keeping the evidence. Prime Innovation, a specialist division of Prime Partners, does that for a fixed fee.
The concessions sit in Subdivision 360-A of the Income Tax Assessment Act 1997. A company has to pass the early stage test and one of the two innovation tests at the moment the new shares are issued. There is no application, no registration and no approval, so nobody tells you it is right. The ATO can review it afterwards, which is why the assessment and the evidence behind it matter more here than in a program you apply to.
| Detail | Value |
|---|---|
| Rate | 20% of what was paid for the new shares |
| Type | Non-refundable, so it reduces tax to nil but never pays out |
| Annual cap | $200,000 per investor per income year |
| Most eligible investment | $1,000,000 a year |
An investor puts $500,000 into new shares in a qualifying company and receives a $100,000 offset. If their tax for the year is $80,000, it comes down to nil. The other $20,000 is not refunded and is not carried forward.
| Held for | What happens on sale |
|---|---|
| Twelve months to ten years | Exempt from capital gains tax entirely |
| Less than twelve months | Any gain is taxed under the ordinary rules, and any loss has to be disregarded |
| Ten years or more | The cost base resets to market value on the ten year anniversary, so only growth after that is taxable |
An investor pays $200,000 for shares. Three years later the company is bought and the shares are worth $2,000,000. The whole $1,800,000 gain is exempt, because the shares were held for more than a year and less than ten.
Incorporated in Australia, or registered on the ABR, within the last three income years. Or within the last six, provided total expenses across the last three of those years were $1 million or less.
Total expenses in the prior income year cannot exceed $1 million.
Assessable income in the prior income year cannot exceed $200,000.
Not listed on any stock exchange anywhere, including foreign and junior exchanges.
Objective, self-assessed, and scored against criteria set out in the legislation. Points from different categories can be combined to reach 100.
| Criterion | Points |
|---|---|
| At least 50% of prior year total expenses were eligible R&D deductions | 75 |
| Between 15% and 50% of prior year expenses were eligible R&D deductions | 50 |
| An Accelerating Commercialisation grant received at any time | 75 |
| An eligible accelerator program completed or under way | 50 |
| At least $50,000 of third party investment in new shares by non-associates | 50 |
| A standard patent or plant breeder's right granted in the last five years | 50 |
| An innovation patent or a design right | 25 |
| A co-development agreement with a university or a registered Research Service Provider | 25 |
The alternative, where the company has to be able to demonstrate all five of the following. It is subjective, so it rests on documents that already exist, a business plan, a commercialisation strategy, a competition analysis. A company can ask the ATO for a ruling where certainty matters.
A sophisticated investor under the Corporations Act, meaning net assets of at least $2.5 million, gross income of at least $250,000 in each of the last two years, or an investment of at least $500,000, can claim up to the $200,000 annual cap.
Everyone else can claim, but only where their total ESIC investments for the year come to $50,000 or less, so a maximum offset of $10,000. Invest more than $50,000 and both concessions are lost entirely for that year. There is no partial benefit above the line.
The company has to issue new shares. Buying from another shareholder does not qualify, because the capital never reaches the company.
The investor and their associates cannot hold more than 30 per cent of the equity after the issue.
Shares acquired under a scheme are outside this. Those sit under the ESS startup concessions instead.
An entity that controls or is controlled by the company, or an individual connected to whoever controls it, cannot claim.
Or a wholly owned subsidiary of one. Neither can claim.
The offset has to be claimed in the return for the year the shares were issued, so the acquisition dates have to be on record.
$1 million of expenses or $200,000 of income. There is no margin either side, so a company close to the line needs to know before it issues anything.
Neither test is a formality, and the principles based one in particular needs documents behind it rather than an assertion.
The incorporation window closes. A company that waits can find it has aged out between one round and the next.
Any stock exchange, including a junior or foreign one, ends eligibility.
The most expensive mistake on the investor side. Past $50,000 an unsophisticated investor loses the offset and the capital gains exemption, not just the excess.
The exemption window closes at ten years. After that only growth from the reset cost base is exempt, so the date matters.
The early stage test and the innovation test worked through properly, with the evidence behind each limb recorded as it stood on the day the shares were issued.
Share subscription agreements, investor verification and the compliance documents that go with them.
Sophisticated investor certificates, an investment summary for each investor, and the schedules they will need for the holding period years later.
Full representation if a claim is reviewed, which is the point at which the evidence either exists or it does not.
Many ESICs also claim the R&D Tax Incentive. R&D spend is also what scores the most points on the innovation test, so the two are worth planning together.
Agreed before we start, never a percentage of anybody's benefit.
Eligibility is tested on the day the shares are issued, and there is nobody to appeal to afterwards. Whether you are the company raising or the investor writing the cheque, it is worth knowing where you stand first.
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