ESIC: Tax Incentives for Investors in Australian Early-Stage Startups
If your startup qualifies as an Early Stage Innovation Company (ESIC), investors who buy new shares in it can get tax benefits. That can make your round more attractive to Australian angel investors. The benefit belongs to the investor, but the founder has to show the company qualifies.
What investors get
- A non-refundable carry-forward tax offset of 20% of their qualifying investment, capped at $200,000 a year for the investor and their affiliates combined
- A lower cap applies to investors who are not sophisticated investors
- A capital gains tax exemption on qualifying shares held for at least 12 months and less than 10 years
Source: ATO, Tax incentives for innovation.
Does your company qualify?
A company is an ESIC at a test time if it passes both:
- The early-stage test: limits on the company's age, expenses and income, and it must not be listed
- The innovation test: either the 100-point test or the principles-based test
The responsibility for confirming ESIC status at the test time sits with the investor, so expect investors to ask for evidence.
What to prepare before you raise
- A written ESIC assessment from your tax adviser for the relevant income year
- Financial statements showing expenses and income against the limits
- Evidence for the innovation test
- A cap table and a share register showing new shares issued to investors
The ATO has warned about arrangements where investments do not actually fund the startup's innovation activity, so keep the use of funds clear.
Where a fractional CFO fits
We prepare the financial evidence, the cap table and the use of funds, and work with your tax adviser who confirms ESIC status. Book a free first call if you are planning a round in Sydney.
Frequently asked questions
A non-refundable carry-forward offset of 20% of a qualifying investment in an ESIC, capped at $200,000 a year for the investor and affiliates combined, according to the ATO.
Who benefits, the startup or the investor?The investor. The startup benefits indirectly because its shares are more attractive to Australian investors.
Who confirms ESIC status?The investor carries the onus, so founders usually provide a written assessment from their tax adviser.
Where does this come from?ATO, Tax incentives for innovation: https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/incentives-and-concessions/tax-incentives-for-innovation
Want this set up for your startup?
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Written by Akram El-Karrar, CPA, from the work we do for startups every week.