All about innovation

We've had a series of enquires regarding the uptake of investments that meet the ESIC requirement, so what's my take on this?

- It seems that investors are finding ESIC an extra, rather than a purpose to invest*
- An investment friendly startup might close the round quicker or at an improved valuation**
- Investment doesn't happen just because of ESIC eligibility

This might not be the full story as we do not offer a matching service, only a transparent tracking service. *It may also be due to the fact that ESIC status remains unclear due to ambiguities regarding the application of the law (and or delay in ATO Private Rulings).

So far, most of the investors involved in closed rounds never engage us, so we are typically dealing with the founders, accountants and lawyers, perhaps the lead investor of a prior round.  This may change as we cross the line into the 2018 tax year and the investors & companies are in a position to claim the offset.

In may ways its still early days for ESIC, 

​Cheers,

Tom 

If ESIC concessions were designed to assist independent follow-on investment in companies, can an investment upon incorporation qualify for the concession?

Its a question we've been asked a few times now and thanks to some kind research and contributions from the ATO and others we are getting to the nub of it.

Chances are the answer will be NO, YOU WERE NOT AN ESIC at the time of investment (probably)!

The law isn't precisely saying this, however it does operate to close out founders and affiliates from the loop. Call this unfair, but be clear, the exclusion of founders was by design.

So what happens if your venture was trading as a sole trader/pship and you incorporated upon receipt of funding???

In this instance, the money was new, and that money could be independent, so its the same as any other ESIC investment right? Wrong.

In terms of the company, you need to ask two tricky questions;

- Was the company, immediately after receipt of the funds 'genuinely focused on developing the innovation'
- Are the investors affiliates (or acting in concert with the founder)

We think that neither test is impossible to pass, however both are particularly problematic for founders, for example; were you acting in concert or in accordance with the wishes of investors when you incorporated? Yes? So why are you not affiliated?

It gets worse, as often that formation capital would be handy to add 50 points towards subsequent points based innovation (i.e. the 100 points test).

Our advice, get an ATO ruling! These issues will turn on your personal facts, up and until such time as a general determination issues to help clarify the matter. Even then, its going to be a tricky area.

Go well,


Tom

People fond of the KISS principal rarely find themselves engaged in ESIC. Its too far from the comfort zone and as such, we're frequently confronted with ESIC assessments that are far from vanilla.

Innovative advisers often put in place complex foundations, for reasons such as; 

 - Asset protection
 - Licencing 
 - International markets
 - CGT planning
 - Exit, ETC

The concern is that many of these designs and models maybe unhelpful when one considers the law's pertaining to ESIC. 

Take the 'vanilla' separation of IP and trading strategy. Holding PL with two 100% owned subsidiaries.

For a start you've got issues with R&D, but that aside, will the ATO agree that investment in Holding PL is investment in an ESIC when its actually IP co that owns the innovation and trading co that's engaged in commercialisation?

We've seen this exact model rejected by the ATO, even with consideration of the consolidation regime.

OK, that may not be the result in trial, or in other circumstances, however its a good clue regarding the policy interpretation and may result in many early stage innovation companies becoming ineligible ESIC's.

Its a developing area and one of considerable interest.

Consider a two company structure where company B acquires the IP of company A. Good from an investment clarity perspective. Innovation = share ownership = commercialisation, however more difficult for consideration of the early stage, revenue, expenditure and incorporation tests.

For Startups, fail fast & pivot aren't just buzz words, they're a method statement, so the intersection of ESIC laws, complex structuring and innovation is sure to cause more than a few trials before these complexities are drawn out.

Don't drown in complexity; Get your MVP, funding, move forward, fast! 

That's what ESIC is trying to incentivise,

Cheers,

Tom

Towards the end of the third quarter of last year I turned the corner in my regard of ATO private ruling for ESIC's. 

It wasn't just the existence of some quality guidance in the determinations and the bonus of having rulings cover not just the day of investment, but an entire year. It was the approach and speed that rulings were progressing.

Not to name names, but to say we'd know some happy companies isn't a stretch ;0)

Opening the new calendar year, we've seen a flood of PBR's, which is a good sign for demand. The trouble is keeping things moving, and as expected the early trickle is now turning tropical, with over 100 applications to hand with the ATO.

We're glad that some of the early Jan/Feb application are affiliated, however you'd best be quick if that seed / series A is closing before June and the ATO ruling is a deal maker/breaker.

Feel free to get in touch if you'd like some guidance,

Cheers,


Tom

We have previously noted the frequent presumption of high R&D expenditure in ESIC pre assessments, often being something that comes unstuck on further review.

Take note of recient ATO comments;

Startups should ensure that activities are generating new knowledge or undertaking experimentation of new technologies; that the technical uncertainty being addressed by the activity is clearly identified; and that the activities claimed are directly related to supporting experimental activities.

Fortunately / typically we are helping to do good work for the ATO, however that service is limited and we highly recommend you seek expert assistance from the likes of www.rimon.com.au

Knowing where your headed is half the battle, so avoiding pitfalls and deadends is an opportunity, not a knock back.

Not all ESIC's are eligible for R&D tax claims.

Happy commercialisation,


Tom