As part of the National Innovation and Science Agenda (NISA), the Australian Government is encouraging innovation, entrepreneurship and risk-taking.
The tax incentives for early stage investors are designed to connect early stage innovation companies (ESICs) with investors who have funds and business experience.
What new tax incentives are available to eligible investors? From 1 July 2016:
- A 20 per cent non-refundable carry-forward tax offset on amounts invested in qualifying ESICs, with the offset capped at $200,000 per investor per year (on an affiliate-inclusive basis); and
- A modified capital gains tax treatment for investments in qualifying shares in an ESIC held for between 12 months and 10 years, provided that the shares held do not constitute more than a 30 per cent interest in the ESIC. Capital losses on shares held less than ten years are disregarded.
Which investors qualify for the incentives?
- An investor, who:
- Directly invests in a qualifying ESIC (receive newly issued shares);
- Is not a widely-held company; and is either:
- An entity that meets the tests for a sophisticated or professional investor pursuant to subsections 8, 10 or 11 of section 708 of the Corporations Act 2001; or
- A retail (or non-sophisticated) investor that has invested $50,000 or less in the income year.
What is a qualifying ESIC?
For an investor to qualify for the incentives, the company they invest in must qualify as an ESIC immediately after the new shares are issued to the investor. A company will qualify as an ESIC if it meets both:
- A – The early stage test; and
- B – One of the innovation tests (100 point innovation test; or principles based innovation test).
A. The Early Stage Test The early stage test has four requirements:
- Incorporated or registered in the Australian Business Register (see specifics of this requirement below);
- Had expenditure of $1 million or less in the previous income year (total for the company and any wholly-owned subsidiaries);
- Had assessable income of $200,000 or less in the previous income year (total for the company and any wholly-owned subsidiaries); and
- 4. is not listed on any stock exchange.
For the incorporation and registration component, there are further qualifications to be met:
- Incorporated in Australia or registered in the Australian Business Register in the last 3 years (including the current income year); or
- If neither of these apply:
- Incorporated in Australia in the last 6 years (including the current year at the test time); and
- Total expenditure for the company and wholly owned subsidiaries in the previous three income years does not exceed $1 million.
B. The Innovation Tests The company must satisfy either of the following innovation tests as well:
- 100 point innovation test (also referred to as the gateway test), which is an objective set of tests to identify an ESIC; or
- Principles based innovation test, which has five separate requirements.
Either the ESIC or potential investor can seek a ruling from the Australian Taxation Office in relation to the application of the above innovation tests to their circumstances. You will need to provide details on how you believe the company meets the early stage and innovation tests.
Reference: business.gov.au fact sheet: Tax incentives for early stage investors