ESIC tax incentives for innovative investors

As part of the ATO’s commitment to supporting Australian businesses with innovation, a number of tax incentives for investors looking to engage with early stage innovation companies (ESICs) are currently available.

1. A non-refundable carry forward tax offset
   This is capped at 20% of the initial investment and to a maximum offset amount of $200,000 for each income year.
2. Modified CGT treatment on disposal of shares
   Where the shares in the ESIC are held for more than 12 months but less than 10 years, any capital gains on their disposal can be disregarded.  Capital losses are also disregarded where the shares are held for less than 10 years.

There are a number of key benefits associated with these incentives for investors including:

• The tax incentives are open to both resident and non-resident investors.
• Where a company ceases to be an ESIC, the investor’s entitlements to the ESIC tax incentives are not impacted.
• Special rules apply where a trust or a partnership is the investor, such that the tax incentives will flow through to the beneficiaries or partners.

The ATO website includes full details and a number of tests available to companies and investors to ensure their eligibility including

• The sophisticated investor test
• The early stage innovation company test
• The 100-point innovation test
• The principles-based innovation test

Rockwell Private Law has experience in assisting companies seeking ESIC status, and investor clients to understand the eligibility requirements, and structure their investments to ensure maximum usage of the available tax incentives, including:

• Issuing ESIC shares to a company where the shareholders are investors (each holding varying percentages). The investment would be $1M into the ESIC to achieve a full $200,000 tax offset.
• Issuing ESIC shares to a unit trust. This allows the tax incentives to flow directly to the investors (being the unit holders). The investment would be $1M into the ESIC to achieve a full $200,000 tax offset.
• Issuing the ESIC shares to a superannuation fund. Special rules apply for an investment by a superannuation fund such that tax incentives are to the trustee of the superannuation fund and not the individual members.

Investors must also be aware of the anti-avoidance provisions under Part IVA of the ITAA36 in relation to schemes that qualify for the tax incentives. For more information on ESIC incentives, or advice on investment structures, please contact our team.