An E.S.I.C. is an Australian company that is recognised by the Australian Tax Office as having Early Stage Innovation Company (ESIC) status. ESIC rules are designed to encourage investment in highly innovative newly incorporated Australian companies. To access the concession a newly formed company may self-certify, use a 3rd party pre-validation (such as the 100 points test) or apply for a binding Australian Tax Office ruling, including the company, the investor or both.
The concessions do not directly benefit the founder(s) so establishing ESIC 'status' is desirable mainly for promotional purposes, namely; to make the company appear more attractive as an investment for taxation reasons, however, as the primary tax benefit only accrues when investors realise a capital gain, we caution investors new to the startup investment market.
Investors must note that claiming an investment as an ESIC puts the onus upon them to assess an support the claim (even many years after the investment has been sold).
The stated aim on introduction of these measures is new investment, hence the incentives are not open to all investment, and exclusions apply to;
- Widely held companies,
- Affiliates, and
- Significant shareholders (30%)
To find out if you qualify as a investor take our Pre-Assessment here and download a copy of our Audit Assistant (record keeping guide) that is available to members.
Consider our record keeping guide.
WHY INVEST IN AN ESIC?
As an investor, an ESIC may provide an opportunity to invest in an innovative company at an earlier stage than typically contemplated, i.e. before the business potential or cashflow have begun to be realised. In recognition of this, and by way of incentive this class of company can be granted generous tax incentives provided all the requirements are met.
Investments in eligible ESICs attract a 20% tax offset and gains on the sale of an ESIC investment may be CGT free (where shares are held for between 1 to 10 years).
To help target the concession and avoid a large revenue losses, various tests apply to companies seeking ESIC status, in the first instance only companies with potential for high growth, scale, large markets and competitive advantage maybe eligible. Alternately, a company can fast track eligibility via the 'objective points test'. Regardless of the method your investment qualified with, you need to have evidence of how the company qualified at the test time.
The tax benefits are not limited to exempt, high net worth investors or professionals, they can be enjoyed by any Australian taxpayer, however the annual cap for investments by qualifying retail investors is strictly limited to $50,000 or less, meaning that an annual tax offset cap of $10,000 applies. An investor is consider retail until they satisfy the Wholesale tests in the Corporations Act. Any retail investor who exceeds the $50,000 in ESIC investment will forfet the concessions.
Wholesale investors are subject to a cap on the tax offset of $200,000 per annum, however the total amount invested can exceed $1,000,000 without jeopardising the ESIC status in regards to capital gains .
In both instances, the amount of capital gains tax relief is unlimited.
Tax advantaged investment
ESIC Directory is a taxation service for startups and investors. Since the legislation was anounced we have keep a close eye on ATO interpretation and guidance, making complex decisions quickly and with relative ease (and or automation).
Our service does not include any fundraising, financial product or investment advise. You must see a qualified financial planner, broker or agent in that regard.
Review / Listing on the directory provides taxation guidance only, subject to the limitations within our terms & conditions and or with regards to the limited review provided (and referenced) by affiliated, licenced tax agents.
Tax agent registrations can be reviewed in real time at http://www.tpb.gov.au/ and we encourage you to make your own enquiry regarding professional designations & memberships.
ESIC's are early stage high risk ventures that are much more likely to fail, as such you should seek professional advice and undertake your own due diligence before making any investment. ESIC status cannot be relied upon as an indication of future results. The ESIC Directory is a taxation service only and we make no prediction regarding to financial matters such as gains, dividends or profits. ESIC Directory information is for general purposes only and does not take into account your personal objectives, financial situation or needs.
Our Directory provides a listing of companies at various stages of assessment for the concessions. This service is for wholesale investors already associated with the companies, or as a reference to others seeking to learn more about ESIC companies in general.
ESIC investors must obtain substantive documentation to support every element of qualification and keep those records for as long as 5 years after the tax lodgement that evidences the eventual disposal of the investment. A listing on our directory does not qualify as substantiation, even where it is accompanied by an accountants certificate or ATO private ruling. Investors must take all steps necessary including enquiries as to the facts underscoring the claim.
Investors wishing to fully verify the tax offset and CGT treatment should consider a private ruling request with the Australian Tax Office. On occasion some, though not all ESIC's we list will have a supporting ATO ruling.
Our directory lists a number of tax and innovation consultants who can assist in all matters relating to these concessions, including ruling requests. This list is not exhaustive, or exclusive and is not an endorsement of the service provided.
Taxpayers can rest a little easier once eligibility and investment is established, as the incentives are available even where an ESIC no longer qualifies for the concession on later investments, providing the company was an ESIC when the investment occurred.