All about innovation

It's no surprise that we recommend you seek expert accounting support with your early stage venture, particularly in regards to ESIC status, for good measure, literally.

Take the following examples, firstly one that's measures up and another that left me wanting.

The first, a company with over $5 million already invested in a tech start-up, who had taken the logical step in capitalising its IP in development of the system and deferring the R&D claim in the tax reconciliation to the year of receipt, all prior to a voluntary audit. The latter, a much more modest start-up who expensed all its development cost (to carryforward losses) and booked the R&D claim on an accruals basis.

On face value, you would expect the earlier company with significant cashflows to struggle on its ATO ruling application, with the latter, smaller business being more likely to qualify.

Well I can confirm the well capitalised company was considered an Early Stage Innovation Company (even with $5 million invested).

All accounted for,

Tom

You might have read through this ESIC stuff a few times and figured you have it down pat, yep, early stage + points or principals.

Trouble is, the enactment of the measures runs counter logical on occasion, for example;

Right now subparagraph 360-40(1)(a)(ii), regarding the early stage test should be read as, - the last 3 income years will include the years ending 30 June 2017, 2016 and 2015

and

 - the last 6 income years will include the years ending 30 June 2017, 2016, 2015, 2014, 2013 and 2012.

Double take intended, 

So this means you need to guess that the 2017 year total expenditure will be under the $1,000,000 threshold before making the investment.

It might seem pretty easy with a brand new start-up, but what happens where pre seed was 500k and the current ESIC seed round is 800k? Is the company going to spend most of your 800k, on top of an earlier 500k during the year and invalidate your tax concession, simply because of raising money!

So your probably thinking that's nuts, well it is, and the ATO agree its not perfect, yet, it is the law of the land at present so don't expect any concession, or a blind eye turned. These numbers are black and white upon lodgement of next years company tax return!

Guess again,


Tom

If you are like me, you'd prefer to ask a friend, classmate or collegue than go to the 'boss' for advise or guidance on something. Its not that you are week or untrusting, it just seems easier to ask someone at your own level for advice.

So it is with companies seeking ESIC status, often turning to the ATO ruling as a Plan C, after failing the points test, and failing to categorically assess on principals. Its fair to say that 'we' approach the ATO with some trepidation. 

Reconfirming this are reports showing a less than easy pathway ahead of applicants. 

http://www.afr.com/leadership/entrepreneur/ato-makes-applicants-work-hard-for-early-stage-innovation-company-status-20161109-gsldb2 

Yet, you should take some comfort from this and the experiance of some of our own ESIC's, for example, we have learned that;

- the ATO are issuing prospective rulings that allow a window of investment (not as we previously indicated) a retrospective rulling that's outdated by the time its issued
- rulings are not taking as long as you would expect, in some cases less than 1 month!
- the rullings typcially cover 1/7/16 to 30/6/17
- the documentation and followup questioning isn't extra-ordinary

On the down side, the ATO rulings are as allways issued with the following limitations;
- The ruling does not represent a guarantee 
- The ruling is only about how the tax law applies based upon the facts and information that you have provided. - The ruling should not be used in promotional materials to imply that we guarantee or endorse investment in your company.
- Potential investors must form their own view about the commercial and financial viability of the company. 
- The Commissioner recommends a financial (or other) adviser be consulted for such information 

And then there is the added cost of an application, being anywhere from $1,000 to $9,000.

So what's my advice? 

I've got to say its horses for courses, if you need an ATO ruling you shouldn't hesitate, get your details together and get an application in, its only going to get busyer next year, however, if you are not sure if you qualify, then don't, get some advice and think about how you can accrue points, it may take about the same time to confirm eligibility but the points system will benefit you twice, firstly with ESIC confirmation and secondly with the credit that's ascribed to your completed criteria.

As always I hope that helps,


Tom

Toddlers, you've got to love them, but who knows how to control them! My 3 year-old is the light of my life, though I really can't wait until he's grown out of this phase.

ESIC companies can not take the some approach, and must grow up fast!

If you're company was incorporated from 1/7/14 to the 1/7/15, you're officially managing a 3nager. Yes, that's 2015, 2016 and the current tax year combining towards the 3 tax years, even if the company is probably only 2 years old as you read this.

On 1/7/17 you'll be considered 4, and as a 4 year-old you'll be expected to jump another through s360-40, which requires you to accumulate 3 tax years expenses within a 1 million dollar cap.

To complicate that further, as you include the current year in your cap test. Problem; even though you don't know how much you have spent yet, and investment will increase that spend, you need to confirm your under the cap.

The moral of this story and theme of this blog, Early Stage Innovation Companies can't wait for tax time, get your credentials and get funded as fast as you can. Your chance at ESIC fuelled investment will be gone before you know it.

Go well,


Tom