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Tax Incentives for Investors in Early Stage Innovation Companies (ESIC)

Tax Incentives for Investors in Early Stage Innovation Companies (ESIC)
From 1 July 2016, investors in a qualifying early stage innovation company (ESIC) may be eligible for tax incentives. 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.

The maximum tax offset cap of $200,000 doesn’t limit the shares that qualify for the modified CGT treatment.
Michael Johnson Associates (MJA) is assisting early stage companies and their investors to determine if the company is a qualifying ESIC. The first limb of the definition covers basic criteria including company age, turnover and expenditure. Once satisfied, the second limb is based on either a points test (objective test), or a principles test (subjective test) (refer to Fact Sheet 1). There are also rules for the investor that must be satisfied for the ESIC investment to qualify for these tax incentives (refer to Fact Sheet 2).
The ESIC tax incentives provide the opportunity for investors to gain significant tax advantages for up to ten years in the event the ESIC is successful. However, the onus is on the investor to ensure that the company in which they are investing qualifies. There are number of ways to undertake this exercise.

  • Where a company meets the first limb of the definition it is first important to determine whether it is possible to meet the second limb 100 points test, an objective test that is quite easily established as go/no go.
  • Where a company meets the first limb but is unable to satisfy the points test of the second limb, it is the responsibility of the investor to determine that the company satisfies the second limb principles test, a more subjective exercise.

For either of these outcomes, the ultimate certainty is provided by a private ruling from the Australian Tax Office (ATO). We would recommend this course of action for any company or their potential investors seeking to assess under the principles test, and we have a guided a number of ESICs through this process.

MJA is able to assist investors and potential ESICs through this process by:

  • Confirming that the ESIC meets the first limb of the definition at the test time
  • Confirming that the ESIC meets the 100 points test at the test time
  • Where unable to meet the 100 points test, preparing commentary on the 5 principles, collating supporting documentation to support the position, and where required, lodging a private ruling or class ruling application with the ATO.

Please call Melanie Reen at MJA on (02) 9810 7211 or 0415 542 285 for further information on how we can assist.

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