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Tax incentives for early stage investors

As part of the Australian Government’s ongoing efforts to promote innovation, a range of Tax incentives were introduced from 1st July 2016 for investments in qualifying Early Stage Innovation Companies (ESICs) by Eligible investors. The incentives are contained in Division 360 of the Income Tax Assessment Act 1997. 

In summary

From 1st July 2016, tax incentives are available to Eligible investors who invest in qualifying ESICs.


What is an Eligible investor?

An Eligible investor is either: 

• A sophisticated or professional investor (as defined in the Corporations Act); or 

• A retail (or non-sophisticated) investor that has invested $50,000 or less in the income year.


What is a qualifying ESIC? (Early Stage Innovation Company)

A company will qualify as an ESIC if it meets both: 

• the early stage tests; and 

• one of the innovation tests 


Early Stage tests

• The company had expenditure of $1,000,000 or less in the prior income year;

• The company had assessable income of $200,000 or less in the prior income year;  

• The company is not listed on any stock exchange; 

• The company was incorporated in Australia;


Innovation tests

The company is involved in innovation, by either;

• meeting a principles-based test through self-assessment; or

• meeting a 100 point “gateway test” through self-assessment; or

• receiving a determination from the Australian Taxation Office.  


What incentives are available?

The tax incentives provide eligible investors with:

• a 20 percent carry-forward tax offset on amounts invested in qualifying ESICs, with the offset capped at $200,000 per investor per year and;

• a 10-year exemption on capital gains tax for investments held as shares in an ESIC for at least 12 months, provided that the shares held do not constitute more than a 30 percent interest in the ESIC.


20% tax offset example

Lets assume John invests $300,000 in a qualifying ESIC. He can offset (ie reduce his taxable income) by 20% of the amount invested (ie $60,000) in the current year. If he offsets a lower amount, the excess can be carried forward to later income year(s). 


Disclaimer

We’ve provided a summary only of the Early Stage Tax Incentives above. Please obtain professional advice if you intend to take advantage of these incentives.

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