A guide to new tax incentives for early stage investors

By Daniel Dubois

Start-up businesses rejoice! Changes to the tax system for the 2017 tax year have been introduced to incentivise investors to provide capital to innovative start-ups.

Here we provide an overview of the tax incentives and explain how to qualify as an Early Stage Innovation Company (ESIC).

What are the incentives?

The provisions include:

• A 20% non-refundable tax offset against other tax payable, up to a cap of $200,000 for each income year as part of a maximum limit of $1 million for wholesale investors
• Exemption from capital gains tax after 12 months for up to 10 years from the anniversary of investor buy-in
• An investment limit of $50,000 per annum for retail investors
• Availability for individual investments up to 30% of the equity of the entity.

Who is eligible?

To qualify, start-ups must satisfy the ‘early-stage test’, and either the ‘100-points innovation test’ or the ‘principles-based innovation test’.

Early stage test

To meet the early stage test, the company must have been incorporated or registered on the Australian Business Register within the last 3 years.

Alternatively, it can have been set up within the last 6 years and had total expenses of $1 million or less, plus assessable income of less than $200,000 in the last financial year.

Lastly, the company cannot be listed on any Australian or foreign stock exchange.

The 100-point innovation test  

To qualify under this test, the company must obtain at least 100 points by meeting certain innovation criteria.

Example criteria include whether at least 50% of its total expenses were eligible for the R&D tax offset, or if the company received an Accelerating Commercialisation Grant.

View the full list of criteria and associated points here.

Principles test 

Qualifying ESICs must meet all of these criteria:

• They must have a focus on innovation for commercialisation
• The innovation must be scalable with reference to both increasing market share and ability to reduce per unit costs
• There must be potential for higher growth across broader markets than current solutions, plus potential for competitive advantage.

While there is a degree of ambiguity, particularly with reference to the principles test, the incentives offer an exciting opportunity to investors and start-ups with the appropriate innovation profile.

Want to know more?

To find out if your company qualifies as an Early Stage Innovation Company, please contact Daniel Dubois or Luke Henry at LDB on (03) 9875 2900 or fill in the contact form below.