As part of the Government’s National Innovation and Science Agenda (NISA), the Government is driving new initiatives to support innovation in the Australian economy and has passed new tax legislation to ‘incentivise’ angel investment.
How do the incentives work?
If you are in the early stages of establishing your business and looking to attract new investors to invest in your startup, you may qualify as an ‘Australian Early Stage Innovation Company’ (ESIC).
From 1 July 2016, a qualifying investor may be entitled to:
- A non-refundable tax offset equal to 20% of the value paid for newly issued equity interests (qualifying shares) in an ESIC capped at $200,000;
- Modified Capital Gains Tax (CGT) treatment, being:
- capital gains on qualifying shares continuously held in an ESIC for at least 12 months and less than 10 years may be disregarded;
- capital losses on shares continuously held less than 10 years must be disregarded; and
- the modified CGT treatment is not limited to the maximum tax offset cap of $200,000.
These incentives are only available on issue of new shares in the company where the company qualifies as an ESIC at the point of time the new shares are issued.
Who is a qualifying investor?
A qualifying investor includes both sophisticated investors and retail investors. However, where the investor is not a sophisticated investor (i.e. a retail investor), investment in any ESIC must be capped at $50,000 during an income year to qualify for the tax incentives. This limit does not apply for sophisticated investors, who meet certain criteria under the Corporations Act 2001 and do not have to be provided with a disclosure document, such as a prospectus or product disclosure statement, when being offered shares in a company.
Investors can be either Australian residents or non-residents, such as individuals, companies or members of a trust or partnership. However, an investor will not qualify for any of the investor incentives if:
- shares are purchased under an Employee Share Scheme;
- the investor and the ESIC are affiliates of each other;
- the investor holds more than 30% of the equity in the ESIC or its connected entities; or
- the investor is a widely-held company or a subsidiary of a widely-held company.
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What is a qualifying ESIC?
For a company to qualify as an ESIC, it must meet the early stage and innovation tests (either as a 100-point test or principles-based test).
In summary, these take into account considerations such as:
- Location and timing of your company’s incorporation;
- Income and expenditure of your business; and
- Whether your business has:
- incurred Research & Development expenditure;
- received an Accelerating Commercialisation Grant;
- participated in accelerator programs;
- received third party investment previously;
- rights (including equitable rights) to a registered patent, innovation patent, design or plant breeder’s rights;
- research agreements in place with research institutes or research service providers;
- developed one or more new or significantly improved innovations for commercialisation;
- high growth potential;
- potential to successfully scale up the business;
- potential to address a broader than local market; and
- potential to have competitive advantages.
How can mdp assist?
The team at mdp have extensive experience in assisting clients in every stage of their business, and helping companies commercialise their innovations.
We can assist with general advice regarding how your business can fall within the ESIC criteria (or be eligible as a qualifying investor) as well as improving your eligibility for the incentives (such as through intellectual property licensing agreements). We also assist with capital raising, effective tax planning and protecting innovations and intellectual property assets, including patent protection.