Early Stage Innovation Company (ESIC) status offers a range of tax benefits to investors who purchase shares in eligible companies. The tax breaks are designed to make the company a more attractive option for investors as the investment provides for a 20% tax offset. In addition, any capital gain on the share price is effectively disregarded for CGT purposes (subject to timing and other rules).
For early-stage businesses seeking funding, ESIC status helps to attract investors and increase capital. But there are a lot of elements to consider when pursuing ESIC status or investing in an ESIC. Check out our ESIC eligibility FAQs!
Is Your Company Truly ‘Early Stage’?
To qualify for ESIC status, a company must meet the early stage test requirements outlined by the ATO . As part of these requirements, the company must have been incorporated or registered in Australia within the last three income years. The company, and any wholly owned subsidiaries, must have total expenses of less than $1m and assessable income of less than $200,000 in the previous financial year.
Alternatively, a company incorporated within the last six income years may also be eligible. In this case the company and any wholly owned subsidiaries must have total combined expenses of less than $1m for the 3 previous financial years and assessable income of less than $200,000 in the previous financial year.
Additionally, shares issued must be new shares and they cannot be listed for quotation in the official list of any stock exchange.
Does Your Company Meet the Innovation Test Criteria for ESIC?
In addition to being early stage, a company must qualify under either the 100-point or principles-based innovation test. These tests require the company to demonstrate a history of innovation and that it is developing new or significantly improved products, processes, or services that have the potential to generate high growth across a broader than local market.
Are the Shares New Equity Interests?
To be eligible for ESIC status, shares issued by the company must be new equity interests. This means they must not have been previously issued or held by anyone. However, the company is assessed for ESIC status as it meets the requirements when such shares are first issued – meaning the tax incentives may be available for prior investment rounds, even if the company no longer qualifies under this criteria.
Is the Company Widely Held?
Widely held companies (either a company that is listed on an approved stock exchange or a company with more than 50 shareholders) are not eligible for the ESIC incentive.
Will You Deal With Sophisticated Vs. Unsophisticated Investors?
ESIC investors can be either sophisticated or unsophisticated, determined by requirements outlined under the Corporations Act 2001. While the tax offset for sophisticated investors is capped at $200,000 per year, their total share value investment in ESIC companies is not limited. However, unsophisticated investors are restricted by a share value cap of $50,000 across all ESIC investments in any given financial year, with a maximum income tax offset of $10,000.
Will You Consider Employee Share Schemes for the ESIC Tax Offset?
Shares issued under an employee incentive scheme are not eligible for the ESIC tax offset.
Can Investors Be Affiliates of an ESIC?
Investors who are affiliates of the company at the time of qualifying for ESIC status are not eligible to receive the tax offset. Additionally, affiliates or associates cannot purchase shares to assist the company in meeting the innovation test requirements.
Do I Need To Be An Australian Resident to Apply for ESIC Status?
To be eligible for ESIC status, the company must’ve been incorporated or registered in the Australian Business Register. Investors don’t need to be Australian residents, but foreign residents may find the tax incentives redundant if they're not paying tax in Australia.
What are the Rules for Trusts and Superannuation Funds within the ESIC Program?
If the investor is a trust, partnership or superannuation fund, specific rules apply that dictate who or what individual entity is entitled to and/or receives the tax incentives. This is an area that requires specialist advice to ensure the tax incentives are correctly dealt with.
What Documentation Do Companies and Investors Need for ESIC?
Companies applying for ESIC status are required to complete a report with the details of each investment received for the issuing of new shares within a financial year. In submitting the form to the ATO, the company must meet the ESIC requirements for all reported investments, and it must keep documentation that supports its claim to ESIC status. This might include business plans, R&D documentation, growth forecasts, etc.
To claim the ESIC tax offset, investors must keep appropriate documentation, including a copy of the investor certificate and proof of payment.
Can an Investor Cash Out or Carry Forward the ESIC Tax Offset?
The tax offset is non-refundable, however it can be carried forward into future income years, allowing investors to apply the offset against future income tax liabilities when they are eligible. This flexibility ensures that businesses can benefit from the offset event if they do not have sufficient taxable income in the current year.
Talk to our Grants and Incentives Experts About Your ESIC Eligibility
Applying for ESIC status isn’t easy and there are many factors to consider. It's important to carefully consider the eligibility criteria and seek professional advice to ensure you’re making the most of the tax benefits on offer. Get in touch to discuss ESIC eligibility today.
