From 1 July 2016 a generous tax incentive has been made available for investment in Early Stage Innovation Companies (ESICs) by providing eligible investors with a tax offset and capital gains tax exemptions on their eligible investments.
The Government has designed the incentive to lure investors with business experience and available funds to assist entrepreneurs in developing successful innovation companies, by investing in qualifying companies in an effort to promote a culture of entrepreneurship and innovation in the start-up environment. In turn this will provide qualifying ESIC’s much needed initial capital to further develop and commercialise their concept.
Like any new incentive introduced, the devil is in the detail and can be minefield of red tape so advice should be sought before trying to apply these new incentives to ensure eligibility…
There are two key incentives available to eligible investors:
The tax incentive is available to all types of investors, other than ‘widely held companies’ and 100% subsidiaries of these companies. The investor must also not be an affiliate of the qualifying ESIC.
An Australian-incorporated company will qualify as an ESIC if it passes both limbs of a two limb test namely the ‘early stage’ and ‘innovation’ limbs.
To pass the early stage limb, the company must pass each of the following:
If the early stage limb is passed, a company has three options to satisfy the innovation limb. The company may choose to:
Buyer beware though, it is recommended that an investment is only made in a company that has professionally undertaken the self-assessment process and has supporting documents or has a ruling from the Australian Taxation Office (ATO) as to its eligibility to qualify as an ESIC. There are also reporting requirements on ESIC’s that receive investment under this incentive.
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