Some learnings based on a question put to the ATO forum; which reads
I invested in a company on 27/6 that qualified for ESIC in the 18/19 financial year. They lodge the application for ESIC for both the 18/19 and the 19/20 financial year on 31/7/20. To meet the ESIC requirements, they did the 100 point test and obtained 50 points from my investment (as a third party investor) would i still quality to claim for the ESIC tax incentive?
From the ATO website on ESIC, i know i can carry the tax offset forward. As i have already lodge the 2018/19 tax return, can i just start the tax offset for the 2019/20 tax year?
Also am i able break up the investment amount to a max 50k over a few years so i do not hv to meet the sophisticated investor requirement?
An investor will not qualify for the first independent 50k investment made because of the investment made*, however this does not rule out qualification, it just means we need to look to the principals based assessment for the company. It is not uncommon for companies to gain points qualification after a seed or pre-seed raise. More info about the principals method is here.
Generally speaking, if the company qualified at the time of the investment* (without the points attributed to your investment), and you also qualified at that time, you will able to claim the carry forward offset in a latter year (assuming you have tax to pay).
Keep in mind that if you invest 1 cent over 50k per annum (across all your investments) you will not be eligible for ESIC incentives unless you are an exempt 708 investor at the time. It is permissible for retail investors to make a series of investments in ESIC's or the same ESIC, provided the 50k cap is not exceeded in any given tax year.
You should contact the company and find out if they lodged ESIC notification each year with the ATO or if they acquired a Private Binding Ruling (PBR). Ultimately it is your responsibility to maintain proof your ESIC claim so I recommend you read up in detail and try to find a guide for record keeping.
* this is a clear anti avoidance mechanism, outlined in the EM
* Investment on 27/6 could be a timing issue, if this was the last year, I'd recommend you consider the date of the investment (per the company register) and not the date you paid.
* Assumes ordinary shares (not convertible notes etc)
We were recently asked 'What happens when my ESIC is listed on the ASX?' or ‘What happens when my ESIC converts from a Private into a Public Company?’
These seem like good problems to have, though it’s natural for early stage investors to become anxious, after all, they are the ones who have to prove any claim.
ESIC policy contemplated capital gain, so it should not come as a surprise to find that the tax rules do not differentiate these changes as the company progresses from strength to strength. ESIC status is established at the point of investment, not at exit.
Simply put, with all other things being aligned, the established prior ESIC status remains, and assuming the concession applies, and timing rules are met, then the taxpayer can disregard the capital gain.
*The 12 month holding rule, 10 year limitation and eligibility of the investor.
Savvy investors would be wise to review proofing documentation and or consider a private binding ruling, if they have not done so already.
We often find that founders overlook the early stage tests in a rush to confirm they have sufficient points to qualify as an ESIC, though even professionals can jump to conclusions based on intuition or cognitive bias.
One good example of this is the hurdle regarding prior listing. Conservative advisers may assume that listing includes listing by proxy, i.e. ownership via a listed entity along similar lines to the rules that apply in the Corporations Act, though careful review of ATO guidance indicates otherwise.
ATO rulings have taken a more direct interpretation of listing, applying it directly to the company itself, i.e. the threshold is simply 'has this company listed'.
You may argue that this is not within the spirit or policy intent, though others would counter that the overarching goal of incentivised innovation is encouraged.
We'll be watching closely to see how the upcoming Tax Determination handles this issue and recommend that companies with listed company backing take the precautionary step of obtaining a ruling.
You may not think that your company structure has much to do with the act of developing an innovation for commercialisation, though think again.
The ATO recently confirm that subsidiary company would not satisfy the commercialisation limb of the first principal test, 'developing a new and or significantly innovation' as the company itself did not pass the hurdle.
It seems unlikely, however it’s not uncommon for R&D to be claimed in a holding or IP company, with the trading and fundraise in another.
Since the Company does not own the IP it is not genuinely focussed on developing the supplements for commercialisation. Although it operates in conjunction with SubCo and provides funding, this is insufficient to be considered to be genuinely focussed on developing the innovation.
The view was expressed in a private binding ruling, so technically it does not apply to all taxpayers, though we can confirm that this is not the first time the issue has arisen and on prior advise the opinion was the same.
Welcome news, as ASIC issues the first batch of licences allowing seven intermediaries to help small and innovative companies to raise funds from a crowd of investors, following commencement of the Government's equity crowdfunding framework in September 2017.
This framework, has removed regulatory barriers inhibiting Australian entrepreneurs from obtaining the growth capital they need to turn good ideas into commercial successes.
Consistent with ASIC's approach of batching licence applications, the first batch of crowdfunding intermediary licences has been issued to: Big Start, Billfolda, Birchal Financial Services, Equitise, Global Funding Partners, IQX Investment Services and On-Market Bookbuilds. The Government looks forward to more new entrants.
Companies will now be able to raise funds through offers hosted by these intermediaries, with the first offers expected to be available shortly.
Eligible public companies will be able to raise up to $5 million in funds through equity crowdfunding, with retail investors able to invest up to $10,000 per issuing company per year.
More information on the existing CSEF regime for public companies is available on the ASIC website.
The equity crowdfunding regime complements the tax incentives for angel investors in start-ups, the introduction of Open Banking and development of an enhanced regulatory sandbox for new and innovative FinTech products and services.