The ESIC Points Test
The points test was devised as a fast track to early stage innovation company recognition.
The Points Test requires a company to gather objective evidence for investors from internal and independent third party sources, tallied to 100 points or more.
The ATO view is that all points qualifying companies should / would qualify under the principals / innovation test, though the matter has not been subject to judicial review (yet).
Any combination of the eight point scoring accomplishments is sufficient, providing they tally to 100 or above at the time the shares are issued.
Tips
- R&D points require refreshing each tax year (in respect to the prior year spend)
- IP registrations must be completed, merely lodging an application is not sufficient
- Independent investment cannot be used to engineer ESIC status artificially
- R&D spend ratio is assessed against eligible notional deductions, not guesswork, if you are not sure, consider an R&D adviser listed on this website
- Ask for the applicable company tax return(s) or an extract to confirm Turnover, Expenditure and R&D ratios
The most common point scorers;
- Issuing at least $50,000 in new shares to an independent third party investor (Angel/Wholesale Investor)
- Incurring greater than 15% in eligible R&D spend in the prior income tax year
- Undertaking an eligible accelerator program
Innovation Criteria | Points Awarded |
The company has received an Accelerating Commercialisation Grant under the Accelerating Commercialisation element of the Commonwealth’s Entrepreneur’s programme | 75 |
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 | 75 |
The company is undertaking or has completed an eligible accelerator programme | 50 |
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 | 50 |
The company has issued at least $50,000 of shares to a third party | 50 |
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 | 50 |
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 | 25 |
The company has a written agreement to co-develop and commercialise an innovation with a research organization or a university | 25 |
Accelerator programs will typically assert that they are ESIC eligible accelerators, whereas the ATO remain unclear on this area of qualification (unless a private ruling has been sort by the program itself). Companies and investors should ask if the program has a PBR or be wary in assuming qualification.
What makes a $50,000 investment independent?
In most cases the independence of the first $50,000 in Angel investment is obvious, though the existence of a pitch deck and correspondence is not sufficient. The ATO expect that the investor was structurally independent and the company and investor were not acting together to artificially create an ESIC benefit for others.
An investment cannot be independent if:
- it was from a second company, with mirror or majority associated ownership
- it was from a second company 'sufficiently influenced' by the company or associates
- it was by a trustee or trust controlled by an associate
- it was from a partner or trustee of the company
Don't get too smart for your own good here. Purchasing founder shares in Uncle Alberts name isn't going to fool an ATO auditor, nor is interposition of an elaborate structure. The object of the ESIC regime are are clear. Get capital to the right founders fast. Founders should benefit by holding onto more equity and gaining access to capital for rapid commercialisation. Founders don't need a hypothetical tax cut, you need capital.
Notes and other considerations
Self assessed points qualification for ESIC is notoriously inaccurate and poorly documented . We advise investors not to rely on scant documentation, the points test is a documentation test. Do not be misdirected by the online ATO eligibility checker (that is a first run self assessment tool). Ask for the supporting documents and consider our ESIC audit assistant for clues on the content and quality of those records.
The company must pass the Early Stage Test and either the Points test or the Principals Test when the new shares are issued, whilst the investor is also a qualifying investor.
