Frequently Asked Questions
Does inclusion in the ESIC database guarantee my tax offsets and concessions?
No. The ESIC database and 'status' level do not guarantee tax outcomes and should only be used as a helpful indicator. You must consult your tax professional / accountant, your accountant and the ATO to determine the impact of the investment and your unique circumstances. You must assume that all content provided has been prepared without taking into account your objectives, financial situation or needs.
Before acting on the information we provide you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs. You should seek personal financial advice before making any financial or investment decisions. Where the electronic communication refers to a particular financial product, you should obtain a copy of the relevant product disclosure statement or offer document before making any decision in relation to the product.
What is the ESIC database?
The ESIC database is a directory service for Start-ups, Investors and Advisors. You will be able to learn more about early stage companies, tax concessions, thresholds and resources. Search for information, ESIC, Accelerator, Grant, University and other listings. Complete a pre-assessment, ask for help, join our mailing list or find an advisor. Once your a listed, its a great place to be discovered!
Will I get cash back on my investment?
No, the ESIC tax incentives are tax offsets and a capital gains exemption (CGT), i.e. tax that would otherwise be payable upon assessment will be offset or disregarded. If you Pay As You Go (PAYG) you may be entitled to a quarterly variation and or refund upon lodgement of your quarterly instalment or annual return. The CGT relief will simply allow you to keep all the proceeds of the gain, rather than remitting up to half the top marginal tax rate to the ATO.
What type of investment is eligible for ESIC tax offsets?
Purchases of qualifying 'equity interests' e.g. new ordinary shares in a qualifying ESIC are the only investments that may be eligible for the ESIC tax offsets and the CGT tax exemption. Unfortunately employee share schemes (ESS) and redeemable preference shares do not qualify. Some argue that founders, family and friends are eligible for the concession, however we respectfully disagree with those assumption, or strategies towards those ends (noting that affiliate and anti avoidance provisions apply).
Are non-resident investors eligible?
Yes, however the concessions may be less attractive to those who do not have future Australian income or capital gains tax liabilities. Keep in mind that even with a double tax agreement, disregarding the capital gain may help simplify investment for non-tax-residents.
How much is my tax offset (rebate)?
Sophisticated investors can receive up to a $200,000 non-refundable, carry-forward tax offset for your investment. Non exempt / retail investors are limited to $10,000 (on a $50,000 investment). This cap applies to you, your entities and your affiliates and is net off against any carry forward (unclaimed) amounts on an annual basis.
What is a 'Sophisticated Investor'?
Typically your accountant will certify you as a sophisticated investor under S708 of the Corporations Act 2001. To do this, they will assess your prior 2 years gross income are in excess of $250,000 and or your net assets exceed $2.5 million. Further detail can be obtained at www.asic.gov.au
Who is responsible for keeping records of an ESIC claim?
The investor is responsible for keeping records applicable to the claim at the relevant test time, i.e. the time the shares where issued. However, investors are often not in an ideal position to access those records, which is why we developed a guide for record keeping. More information is available here www.esic.directory/esic-audit-assistant/
What happens to my tax concessions if the company is no longer an ESIC eligible company?
Your entitlement to the tax concessions is determined at the test time, and ongoing for up to 10 years, providing you maintain appropriate records. The likely change in company status will not affect your entitlement, providing it was correctly established to begin with.
What kind of activities invalidate my innovation for ESIC?
An innovation is unlikely to be considered new or significantly improved if it is the result of customisation of existing products, minor extensions, changes in pricing strategy, seasonal or cyclical change or activities similar to the approach of competitors. Please refer to the Oslo Manual, published by the OECD. An innovation must be new or significantly improved within the addressable market, which is defined by the available revenue opportunity or market demand arising from the innovation.
What valuation methods should be adopted at the end of 10 years ownership?
The ESIC concession only applies for a maximum of 10 years ownership, thereafter the taxpayer must value the investment. Fortunately, the ATO have provided guidance and acceptable valuation shortcuts.
Can I lodge a Private Ruling with the ATO?
Yes, companies, Investors and Accelerators can lodge a private ruling request with the ATO. Please note that the ruling will only apply to the facts provided in your private ruling request, as such the company/investor is likely to require reassessment of its eligibility as circumstances change. The ATO have determined that ESIC's who qualify via the '100 point test' are not be eligible to apply for the added assurance of a private ruling. Sources indicate this is due to issues such as the overlapping reliance on R&D or similar claims. Feel free to contact ESIC Directory if this impacts you.
Which documents help demonstrate that I pass the principals based innovation test?
Does my business have high growth potential?
An ESIC must demonstrate it has high growth potential, as distinct from typical small to medium enterprises such as cafes, local retail stores, local service providers that service a single local market. To make your assessment, consider if your broad assessable market is large enough, and that your innovation, has potential to expand to capture a meaningful share.
Is my company scalable?
Your company is scalable if it has the potential to multiply existing revenues through a reduced or minimal increase in operating costs or market share dominance. In other words, as the company enters new markets, it has the potential, or will have the potential to create operating leverage that assists it to successfully grow.
Do I need to show how I can address the international market?
No. You must show the capacity to address a market that is broader than a local market, i.e. a market in more than one state in Australia. Frequently that scale-up will have potential to be adapted to a national/multinational/global markets in future.
How do I demonstrate I have the potential to have competitive advantages?
A method of evaluating a competitive advantage can be through the measures of the level of value for customers, rarity, imitability and substitutability of the advantage. It may be for example a cost or differential advantage which is sustainable for the business.
It will not be minor differences or a straight substitute product.
Who is an associate for the purposes of the ≥$50,000 third party investment rule?
Many early stage companies launch with advances from friends, fans and family, before seeking investment from third parties who could be eligible for ESIC incentives. Be that as it may, eligibility for the 50 points awarded for independent investment will not arise unless the funding (through share acquisition) was provided at arms length, i.e. not via an associate, as defined by s318 of the ITAA 1936. Further anti avoidance measures provide that the provision of the funding cannot be primarily to assist another investor to qualify for the concession (i.e. in order to pass the 100 point test).
What does TIFESI stand for?
Tax incentives for early stage investors (TIFESI). Currently 20% of the amount committed under the annual cap (or carried forward from a prior year)
How does an ESIC report the investments?
Apart from the required company secretarial matters, each ESIC has an additional ATO obligation to report, within 31 days of year end in an 'approved form'. The preferred format is online via the tax agents portal or business portal (where you lodge your BAS). Investors lodge early stage investor claims T9 (tax offsets) of the personal income tax return. More information is available at www.esic.directory/innovators.html/esicreporting/
What kind of records do I need for an ATO ESIC Audit?
Having an ATO audit or review is stressful, particularly if you are not aware of the type of records you need. Please consult our ESIC record keeping tool to help discover what type of records you should have, and or the quality of the documents you already hold. https://esic.directory/esic-audit-assistant
Can I qualify for points if I don't directly own valid IP?
Yes, a company that holds a licence to the intellectual property of another party may also qualify for points, providing that IP (e.g. innovation patent) would in its own right qualify (it is 5years old or less) and an applicable licence agreement is in place.
What is a widely held company?
A widely held company is defined by s995 1 of the Corporations Act as:
(a) a company, * shares in which (except shares that carry a right to a fixed rate of * dividend) are listed for quotation in the official list of an * approved stock exchange; or
(b) a company ≥ 50 members, other than a company where at least one of the following conditions is met during an income year:
(i) ≥ 20 persons held, or had the right to acquire or become the holders of, shares representing at least 75% of the value of the shares in the company (other than shares that only carry a right to a fixed rate of dividend);
(ii) at least 75% of the voting power in the company was capable of being exercised by no more than 20 persons;
(iii) at least 75% of the amount of any dividend paid by the company during the year was paid to no more than 20 persons;
(iv) if no dividend was paid by the company during the year the Commissioner is of the opinion that, if a dividend had been paid by the company during the year, at least 75% of the amount of the dividend would have been paid to no more than 20 persons.
How are points awarded for the 100 point innovation test?
If a company can secure 100 points, it can fast track ESIC qualification. Please review the points table at the end of this page and be sure to complete our pre-assessment (even if you appear to qualify). We are more than happy to review your current status without charge and help guide you towards qualification. The 100 points test is also called the objective test so be sure to back up each claim with a document you can provide to your investors.
Has your Startup got enough Innovation?
Having a great business may not be sufficient to establish your company as an ESIC worthy of generous taxation concessions. The following pages help to expand on the innovation pathways, milestones and alternatives for ESIC qualification. You may seek to qualify independently or seek recognition via the ATO or eligible venture partnering. We have broken this down into 3 parts, an introduction to the pathway, key requirements and options for assistance. You can use the menu navigation to jump from or to any section of interest, and or reference any of the extended resources and networks available. Keep in mind, you can use the chat feature during office hours, email us, or call the landline.
Fast Track ESIC Qualification
Attached is the full list of points qualifications, your company needs at least 100, at the time of the issue of equity.
Keep in mind that some points expire, like R&D, and must be renewed.
Service providers can help
Points are awarded for the documentation (not your claim)
Not all 3rd parties are eligible (e.g. accelerators
The company has received an Accelerating Commercialisation Grant under the Accelerating Commercialisation element of the Commonwealth’s Entrepreneur’s programme
At least 50 per cent of the company’s total expenses for the previous income year constitute expenses which are eligible for the tax offset for R&D activities provided under Division 355
The company is undertaking or has completed an eligible accelerator programme
At least 15 and less than 50 per cent of the company’s total expenses for the previous income year constitute expenses which are eligible for the tax offset for R&D activities provided under Division 355
The company has issued at least $50,000 of shares to a third party
Within the last five years, the company has one or more enforceable rights on an innovation through a standard patent or plant breeder’s right that has been granted in Australia or an equivalent intellectual property right granted in another country
Within the last five years, the company has one or more enforceable rights on an innovation through an innovation patent or design right or an equivalent intellectual property right granted in another country
The company has a written agreement to co-develop and commercialise an innovation with a research organization or a university
* Note that double dipping of points for R&D and Patents is prohibited. I.e. a company cannot be awarded points for both an innovation patent and a standard patent, nor can the company gain points for 50% R&D spend and also claim they exceeded 15% R&D at the same time. The greater point score will apply, replacing the lower (and easier hurdle).