An Early Stage Innovation Company is more attractive to investors since it has high growth potential and there are tax incentives for investment.In order for a company to qualify as an ESIC it must have high growth potential, be able to scale, address a broader than local market, and have competitive advantages.
The government has recently passed legislation that 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 business, ESIC status makes you a more attractive investment and lets investors know you are a promising new company. 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 also need submit a lodgement, though it is quite straight forward;
Just log into the Business Portal, selecting ‘online forms’ in the left hand menu, and ‘Early stage innovation company report’ from the forms listed.
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 the information must come from the company.
We encourage investors to seek financial planning and taxation advice before proceeding with any 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 is a double dipping measure.
Investors should consider there own circumstances, predicted capital gains, carry forward losses, marginal tax rates and seek professional guidance in these matters.