An Early Stage Innovation Company (ESIC) is a company that has qualifed for the Australian Innovation Tax incentive, typically by providing evidence that it has high growth potential, is able to scale, can address a broader than local market, and has competitive advantages. ESICs are early stage high risk startups. The legislation, introduced in 2016 provides tax incentives for investments in ESICs.
Investments in ESICs may be eligible for a 20% tax offset, and gains on the sale of an ESIC investment may be CGT free if shares are held for between 1 to 10 years.
As a company, ESIC status makes your share capital a more attractive investment.
Take our ESIC Pre-Assessment here to see if you may qualify as an ESIC.
How do I report investments?
ATO data matching applies, so eligible ESIC's and investors will submit reports.
The ESIC will lodge a report of all investments prior to 31 July each year, via the Business Portal, and eligible Investors will claim the tax concession in the annual income tax return.
If you don't have access to the ATO portal, just ask your Tax Agent to make lodgement for you.
What happens if I make a profit?
A 20% carry forward tax offset is available, together with an unlimited CGT exemption for investments held for more than 12 months and up to 10 years. After 10 years, the investment cost base is converted to its market value.
The offset is limited to $10,000 for retail investors and $200,000 for sophisticated investors.
A cap of $50,000 for retail investors applies with any amount over this invalidating the full amount invested in that year. Capital Gains relief will apply for sophisticated investors who make eligible investments above $1,000,000 (the offset cap).
The onus is on Investors to prove any ESIC offset and CGT exemption claim, notwithstanding most of the information must come from the company.
We encourage investors to seek financial planning and taxation advice before proceeding with any investment or claim
What happens if I make a capital loss?
Investing in private unlisted companies is a high risk investment strategy and share values can decrease, or result in the complete loss of your investment.
If you acquire shares in an eligible ESIC company you will be foregoing the right to a capital loss or carry forward loss, notwithstanding the receipt of a 20% tax offset.
From a policy perspective, this aligns the offset ('notional cash back') with a sacrifice of the future CGT relief that may apply when utilising the loss (against another Capital gain made by the same taxpayer). Essentially this clawback of capital losses is an anti double dipping measure.
Investors should consider their own circumstances, predicted capital gains, carry forward losses, marginal tax rates and seek professional guidance in these matters.