From Little Things – ESIC Tax Offset
As the world changes, technology changes with it. Whether it’s COVID forcing us to embrace remote working, the environment challenging us to think greener, or industry disruption keeping us on our toes, technological innovation is never far away no matter where you are.
It’s a fact of life that venturing into the development of new and more efficient solutions can be a risky and difficult process, often asking for hefty seed funding to cover large amounts of research and development expenditure with no guarantee of commercial success.
Fortunately for both innovators and investors, the early stage innovation company (ESIC) tax offset is a mechanism that provides a significant tax incentive for investors in eligible companies, reducing financial risk and encouraging funding critical to allow bold thinkers to bring their ideas to fruition.
What is an early-stage innovation company?
A company needs to pass the following tests to be ESIC eligible:
The early stage test; and
Either the 100-point test or the principles test.
The early stage test requires a company to have been recently incorporated or registered with the ABR and to have less than $200,000 in assessable income and $1,000,000 in expenses in the prior income year. Additionally, none of the company’s equity interests can be listed.
The 100-point test lists several objective criteria that give a company “points” for meeting them, with a minimum of 100-points required to gain ESIC status. These criteria include, but are not
Incurring a sufficient portion of research & development expenditure;
Undertaking a business accelerator program;
Having significant equity interests issued to non-associates;
Having rights as the patentee or licensee of a patent; and
Having an agreement with an eligible research institution.
The principles-based is a subjective test that requires a company to show it is focused on developing a new innovation with high growth potential that is both scalable and able to penetrate a broad market, and that the company is competitively positioned to do so.
Benefits for investors and innovators
The key tax benefits available to ESIC investors include:
A non-refundable carry forward tax offset equal to 20% of the amount paid for their eligible investments (up to a maximum investment of $1,000,000, with the offset capped at $200,000); and
Disregarding of capital gains on the disposal of ESIC shares held for between one and ten years.
Getting from A to ESIC
Typically, prospective ESIC’s gain their eligibility by way of a Private Binding Ruling (PBR) issued by the ATO. The key to ensuring a company’s ESIC eligibility and by extension protecting your investor’s incentives is documentation. Between tracking research & development expenditure, documenting the company’s capitalisation pathway and proving up the commercial applications of the innovation in question, there can be a significant administrative burden involved in submitting a complete PBR application to the ATO that can get a positive outcome.
If you are interested in how your company can benefit from ESIC eligibility, please don’t hesitate to contact your Hall Chadwick advisor, who can put you in touch with our resident ESIC experts.
Who to get in touch with