An ESIC is an Early Stage Innovation Company as defined by Australian Tax Law. In order for a company to qualify as an ESIC through the Principals Based Assessment system the company must have high growth potential, be able to scale, address a broader than local market, and have competitive advantages. Alternately an Early Stage Company can qualify via the objective Points Based Assessment. Points based qualification does not directly assess the early stage company’s innovation, and instead relies upon independent assessment via government, commercial or other established innovation measures.
ESIC laws help to incentivise investment in early stage companies by providing a 20% tax offset and by removing taxation on capital gains made on the sale of shares held for between 1 to 10 years.
As a business, ESIC status in isolation, makes a company a more attractive for investment. It is a way founders can let investors know you are a promising new company. Take our ESIC Pre-Assessment here to see if you are likely to qualify as an ESIC.
What is innovation and why is tax being used to promote it?
Innovation is what is new and what is new is innovation. The action or process of creating new methods, products, unique and rare benefits that set a business apart is often difficult and risky. Finding capital for risky ventures is difficult and getting harder, so the Australian Federal Government has acted assertively to help bridge the gap and connect funds with promising ventures earlier than before, in the form of generous tax incentives (ESIC).
ESIC is designed to help founders get funded earlier, it does reduce any tax they may pay.
Equally, ESIC will not secure investment in its own right, as the main benefit is gained only on profitable sale of the company shares. ESIC's must be attractive investments in their own right.
ESIC qualification tests how innovative an early stage company is against the statutory criteria, the ESIC Directory Pre-Assessment Tool is an established rule of thumb with over 300 Pre-Assessments completed for companies in the process of ESIC qualification, Fundraising or Accounting for Seed, Series A or B investments
Early Stage Companies Pre-assessment
This pre-assessment will help you explore if qualifying investors in an Australian Company are likely to eligible for Early Stage Innovation Company incentives. The company must pass the Early Stage Test and either the 100 point Innovation Test or the Principles-based Innovation Test to be considered an ESIC in that tax year.
The company should seek a taxation ruling from the Australian Tax Office should any ambiguity or potential disqualification apply.