ESIC incentives can provide a valuable investment edge for investors searching for an innovative, high-growth company investments.
An ESIC is an Early Stage Innovation Company that is recognised by the Australian Tax Office as having ESIC status
Qualifying ESIC investment(s) may provide a 20% carry forward tax offset and enjoy Capital Gains Tax relief for gains made on ESIC shares held for at least 1 and up to 10 years
In practice this means an eligible Investor* is likely to see 20% of the capital invested as either a tax refund or reduction in tax obligations, whilst enjoying a Capital Gains Tax exemption for the profit made on sale of a successful ESIC. *Tax benefits are not limited to exempt, high net worth investors or professionals, they can be enjoyed by any Australian taxpayer, however qualifying investments by non wholesale investors (defined by s708) are strictly limited to $50,000 or less per tax year, meaning that an annual tax offset (relief) cap of $10,000 applies.
Wholesale and exempt investors are subject to a cap on the tax offset of $200,000 per annum.
Capital Gains Tax Relief Is Unlimited
Eligible Individuals claim the ESIC tax offset by simply disclosing the amount in T9 in the personal income tax return (indicated in the image above). Find out if you are an eligible investor here.
Things You Need To Know
The Investor and the ESIC must be eligible at the time the shares are issued. For independent investors eligibility is quick and simple to determine however problems can arise, particularly where passive investment becomes more active. Find out more and try our investor check tool here.
Once you have determined that you are an eligible investor in relation to the ESIC you need to confirm the following;
The purchase acquired new equity interest in the company (e.g. Allotment of Ordinary Shares). ESIC will not apply to transfers of shares, even if the shareholding is in a ESIC eligible company.
The company is an Australian Resident Company.
The Investor is not a widely held Company (e.g. a Listed Public Company).
The Investor must be a wholesale investor or the amount of the investment less than the annual cap amount**.
The Investor and company are not affiliates (e.g. a founder)
The Investment is not part of an Employee Share Scheme
The Investor does / will not own more than 30% of the equity interests in the company, and its connected entities at the test time
The investor is an individual or company or trustee (taxed on the trust's net income)
You have all the necessary records to preserve the ESIC claim
If you are in any doubt please feel free to email us or contact your taxation professional
Things You Need to Know About The ESIC (Company)
In order for a company to qualify as an ESIC via the principals based assessment a company must (amongst other things) have high growth potential, be able to scale, address a broader than local market, and have competitive advantages. Other ESIC's can fast track qualification via a points based objective test that helps to auto assess a company's innovation potential ESIC measures are not for typical or ordinary businesses or investments, even inherently attractive investments. ESIC incentives are targeted at innovation, which is inherently connected to risk. Be sure that the company and innovation are genuinely new and all the applicable tests are met and well documented. Anti avoidance rules apply.
Traditional business are iIneligible, for example: A successful dental practice, cafe, local retailer, local service provider
It is frequently dificult to tell if a company is ESIC. This is why we setup the ESIC Database , to provide a listing of some companies at various stages of or our pre-assessment for the concessions. This service is for for the companies themselves and eligible wholesale investors already associated with the companies, or as a reference to others seeking to learn more about ESIC companies in general.
Feel free to introduce a potential investment company to us, and have them complete the pre-assessment process. In some cases, we can turn this around in 20 minutes, in others we rule out eligibility or provide guidance on ways to improve the likelihood of future qualifications. It is what we are here for.
As an investor, an ESIC provides an opportunity to invest in an innovative company well before its potential has been reached whist enjoying generous tax incentives. Care must be taken, ESIC's are early stage high risk ventures that are much more likely to fail, you should seek professional advice and undertake your own due diligence before making any investment and not rely upon these taxation criteria as an indication of future returns.
ESIC Directory is a taxation service only. Investment in one or more ESIC's may be exciting and tax advantaged however, investors must note that the onus is upon you to prove your investment qualifies for the concession. As such ESIC investors must obtain substantive documentation to support every element of qualification and keep those records for as long as 5 years after 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. Investors wishing to fully verify the tax offset and CGT treatment should consider a private ruling request with the Australian Tax Office. Capital gains relief applies to the investment even when the ESIC no longer qualifies for further ESIC eligible investment.
The hurdle applies when the investment occurred not at subsequent sale (Noting that Strenuous Record Keeping Rules apply). Our directory lists a number of leading tax and innovation experts who can assist in all matters relating to these concessions, including ruling requests. *Prior to Tax Law Amendments a window of eligibility can technically apply for non-resident companies The annual cap amount is $50,000AUD and assessed by the taxpayer during that income tax year. Do not exceed unless you are a s708 wholesale investor!