What is the Tax Incentive for Early Stage Investors?
Australia has adopted a program giving investors tax breaks when they invest in equity in certain small companies (Startups).
It gives investors:
Unlimited Capital Gains Exemption for up to 10 years (after 12 months)
20% Tax Offsets of the investment, capped at $200,000 per annum
Who can be an early stage investor?
Certain rules apply to limit who benefits:
Limited by Investment amount, and
Limited by who the investor is
$200,000 per annum - Wholesale investors limit
$50,000 per annum -Retail investors are limit
The Retail investor cap is fixed (i.e. any amount above it will invalidate the claim)
The Wholesale cap its not fixed (i.e. investment above this amount impacts the tax offset, not the CGT exemption)
Widely held companies and their 100% subsidiaries
An Affiliate of the issuer (i.e. someone who could direct decision making)
Significant Shareholders (30%)
Employee Share Scheme Interests
How can I invest in early stage companies?
You can find qualified ESIC companies listed in our directory
Firstly, you must invest in the right company at the right time to gain the early stage company tax concessions. These companies must have specific attributes to access the program including:
Being early stage (ACN under 6 years old)
Nominal income (under $200,000 in the prior year)
Nominal expenditure (under $1m last year or in the prior 3*)
Being unlisted (not on a stock exchange)
This deliberately targets the concession at loss making, high potential businesses who need capital to grow.
Secondly, the company must prove that it is an eligible innovation company by either;
A fast track method (points test), or
A full assessment (principals test)
Investors will seek to rely on the company founders or advisers to validate ESIC for them, however the ultimate responsibility remains with them.
That's why we developed a record keeping guide and a number of helpful resources to show how hard it can be to provide evidence, from the wrong side of the company boardroom.