Author: Rolf Koops, Partner, Madison Marcus Law Firm
While the Innovation Bill provides favourable tax concessions for investors, there are also rules and eligibility criteria. Rolf Koops, Partner at Madison Marcus Law Firm, summarises the key information you need to know if you are an investor or a company that meets the ESIC eligibility criteria.
ESIC Tax Concessions:
• Shareholders that acquire newly issued shares in an ESIC receive a non-refundable carry-forward tax offset of 20% (subject to an annual cap); and
• a 10 year Capital Gains Tax (CGT) exemption.
For an investor to receive the tax concession, the company being invested in must be classified as an ESIC directly after the company issues the shares.
A company is considered an ESIC if it satisfies both the:
• Early stage limb; and
• Innovation limb.
Early Stage Limb
A company is deemed at the early stage limb if the company:
• was incorporated in Australia in the last three income years;
• was incorporated in Australia in the last six income years and across the last three of those income years, it and its 100% subsidiaries (if any) incurred total expenses of $1m or less; or
• was registered in the Australian Business Register within the last three income years (the latest being the current year); or
• The company and its 100% subsidiaries (if any):
• incurred total expenses of $1m or less in the income year before the current year;
• had a total assessable income of $200,000 or less in the income year before the current year; and
• At the test time, none of the company’s equity interests are listed for quotation in the official list of any stock exchange in Australia or a foreign country.
This limb is satisfied when either the “principle-based test” or the “100 point test” are passed.
This focuses on the company’s substance as innovative through self-assessment. The following elements are required to satisfy the limb:
• a genuine focus on developing for commercialisation of one or more new, or significantly improved, products, processes, services or marketing or organisational methods;
• The high growth potential of the business relating to those products, processes, services or methods;
• the potential to be able to successfully scale that business;
• the potential to address a broader than local market, including global markets, through that business; and
• the potential to have competitive advantages for that business.
There are currently no regulations which exclude specific products, processes, services or methods from passing the test. More guidance is expected to clarify the criteria for investors.
100 Point Test
To view the 100 Point Test Table, please click here.
When a company qualifies as an ESIC, investors may access the concessions if the shares are;
• newly issued on or after 1 July 2016;
• not acquired under an employee share scheme, and
• “equity interests” in the ESIC – shares will be the most common form.
Tax incentives are available to investors who are:
• individuals, companies, trusts or partnerships, as long as they are not a “widely held company” or a subsidiary of a widely held company;
• not an “affiliate” of the ESIC; and
• do not hold more than 30% of the equity interest in the ESIC, or any entities connected to the ESIC.
These incentives are available to all investors irrespective of the preferred mode of investment or their residency.
For investors who invest through a partnership or trust, the partner of the partnership or beneficiary or unitholder of the trust is considered the primary investor in an ESIC.
20% Tax Offset
Acquisition of newly issued shares of an ESIC by investors post 1 July 2016 are entitled to a 20% non-refundable tax offset equal to 20% of the total amount paid for shares.
For sophisticated investors the off-set is capped at $200,000 per annum (a $1,000,000 investment), even if they wish to invest more than $1,000,000 the tax off-set is still $200,000 – the shares may qualify for a CGT exemption.
Non-sophisticated investors, also known as retail investors may only invest up to $50,000 per annum (not over) in an ESIC with a tax off-set of $10,000 to qualify for the ESIC concessions.
CGT Exemption for Investors
ESIC investors will be exempt from CGT from the disposal of ESIC shares held longer than one year and less than ten years. Should the shares be held for longer than ten years, the CGT exemption is applied to any gain attributable to the period up to the tenth year. Notably, the cost base of the shares is calculated as market value of the shares on the tenth anniversary.
A company issuing ESIC shares is to provide information in an approved form to the ATO within 31 days of the end of the financial year. Information will include:
• ESIC identification information including TFNs, names, addresses and ABNs; and
• ESIC qualification information, including:
» declaration the company qualifies as an ESIC given the share issues reported on the form;
» declaration the company is not affiliated with any investor reported on the form;
» a description of the innovation;
» a description of whether the principle-based test or 100-point test has been satisfied;
» any rulings that have been received; and
» investor identification information including names, addresses and type of investor.
The Early Stage Innovation Company initiative is a proactive step taken by the Australian Government to increase investment in innovation.
Madison Marcus can assist and advise you in relation to the process for establishing an Early Stage Innovation Company and advising investors who are considering an investment in Early Stage Innovation Companies.
For more information or if you have any questions relating to this article, please contact the Author, Rolf Koops:
Partner – Taxation
+61 2 8022 1222
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