The Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 contains tax incentives for early stage investors.

This incentive has been laced in very strong legislation and is largely misunderstood by the startup community and interested parties.

Among many points, the bill includes two very generous benefits to startup investors:

1. A non-refundable tax offset to eligible investors, equal to 20% of the amounts paid for newly issued shares in a company considered an “Australian Early Stage Innovation Company” (ESIC).

   • Points to Consider
     • The offset is capped at $200,000 per investor per year for ‘sophisticated investors.’ 
     • The offset is capped at $50,000 per investor per year for ‘non-sophisticated investors.’
     • The relevant investor cannot hold more than 30% of the equity interests in the company or any entity connected with the company.
   •  Sophisticated vs Non-sophisticated Investor – What’s the difference?
     • To be qualified as ‘sophisticated’ you must obtain a certificate from a qualified accountant confirming that you had a gross income of $250,000+ in each of the prior two financial years of the shares being issued.
     • Alternatively, they can confirm that your net assets amount to at least $2.5 million.
     • Certification is valid for two years.
     • If you haven’t guessed it by now a non-sophisticated investor is everyone else below the above threshold.

2. A Capital Gains Tax (CGT) exemption for shares in companies held as Australian ESIC.

   • Points to Consider
     • Any capital gain arising from any CGT event (sale of shares) upon which were held for more than 12 months but less than 10 years can be disregarded.
     • On the 10th anniversary of its issue, if still held, the first element of the cost base and reduced cost base of the share becomes its market value on that day.
     • The CGT exemption is still available even where the company has ceased to be an ESIC.

So.. What is an “Australian Early Stage Innovation Company” (ESIC)? 

The following criteria will guide you on whether your company or the company you’re investing in is an ESIC.

1. The company is registered in the Australian Business Register or has been incorporated in Australia:
   • Within the current or 2 previous income years;
   • or previous 5 income years and incurred total expenses of A$1m or less in the last 3 of those income years (including the expenses of 100% subsidiaries).
2. Have incurred total expenses of A$1m or less (including its 100% subsidiaries) in the income year prior to the income year in which the shares are issued.
3. Have derived a total assessable income of A$200,000 or less (including its 100% subsidiaries) in the year prior to the income year in which the shares are issued.
4. Have no equity interests listed on any stock exchange.
5. Pass a 100 point innovation test, or can demonstrate that the business has high growth potential, satisfying a number of criteria that would be nationally or globally marketable with competitive business advantage.

So..What’s the 100 point innovation test?

The 100 point innovation test is based on:

• Prior levels of R&D expenditure;
• Awarding of entrepreneur grants;
• Previous genuine third party investments above $50,000;
• Co-development agreements with research organisations or universities;
• Holding of enforceable intellectual property rights.

For a deep dive into the 100 points innovation test and to receive an understanding of how points are allocated visit the ATO website – Click Here.

Vist the ESIC directory or contact your financial advisers for more information or guidance on how it all works!