Tax incentives for early stage investors
Updated: Feb 7, 2020
In March 2016, the parliament introduced a bill proposing new tax incentives for innovation aiming to encourage new investment in Australian early-stage innovation companies by providing qualifying investors, who invest in such companies, with a tax offset and a capital gains tax exemption for their investments.
The new legislation can be quite confusing, so to make it easier we have summarised the changes here.
From 1 July 2016, if you invest in a qualifying early stage innovation company (ESIC), you may be eligible for tax incentives.
The tax incentives provide eligible investors who purchase new shares 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 for their investments in each income year
a 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 are exempt from CGT. Capital losses on shares held less than ten years must be disregarded.
Who is eligible?
To be eligible for the incentives, an investor must meet the 'sophisticated investor' test under the Corporations Act 2001 or, the investors’ total investment in qualifying companies must be $50,000 or less for that income year.
The incentive will be available for investments in companies that satisfy two requirements:
That the company is early stage, determined against criteria related to expenditure, assessable income, stock exchange listing and incorporation.
That the company is involved in innovation, determined by allowing the company to self‑assess against either a principles-based test or a points-based gateway test, or by receiving a determination from the Australian Tax Office.
What is a qualifying startup?
Generally, an Australian-incorporated company will qualify as an early-stage innovation company (ESIC) if it meets the tests of being at an early-stage of its development (the early stage test) and it is developing new or significantly improved innovations with the purpose of commercialisation to generate an economic return (the innovation test).
The early stage test
A company must pass four tests to satisfy the early-stage test:
The company must have been incorporated in Australia within the last three income years
The company and any of its wholly-owned subsidiaries must have not incurred ‘total expenses’ of more than $1,000,000 in the previous income year
The company and any of its wholly-owned subsidiaries must have derived assessable income of no more than $200,000 in the previous income year
The company must not be listed on any stock exchange
The innovation test
In order for companies to determine if they satisfy the innovation test, qualifying ESIC test companies may choose to:
Apply their circumstances against the objective tests – must have at least 100 points as judged by the criteria here
Self-assess their circumstances against the principles-based test. The company needs to be genuinely focused on developing its new or significantly improved innovation for commercialisation and must have the potential for high-growth, scalability, can address a broader than local market and has competitive advantages
Seek a ruling from the Commissioner about whether their circumstances satisfy the principles-based test
What are the reporting requirements for the ESIC?
ESICs that receive investments from one or more investor entities in a financial year will need to provide information about those entities to the Commissioner by 31 July of the following financial year. ESICs will need to provide this information in the ‘approved form’.
If you require any further information or wish to discuss these tax incentives, call us today on 02 9299 7044.
Sources: ato.gov.au, innovation.gov.au