What is an ESIC – Early-Stage Innovation Company?
As a small business or start-up looking to expand, you may qualify as an Early-Stage Innovation Company or ESIC. This initiative was launched in 2015 to drive local investment, promote economic growth and innovation within the Australian business ecosytem.
What are the benefits of ESICs?
During the start-up stage, between initial investment and generating revenue, maintaining cash flow is always a challenge. The ESIC scheme is designed to help businesses look attractive to investors so that start-ups can get funds into the business.
Businesses that qualify for ESIC status will be open to investment opportunities to fuel their innovation and growth. As investors receive their own set of benefits, eligible ESIC companies will obtain investment more easily.
Investors are eligible for tax both short- and long-term tax incentives including:
- 20% non-refundable carry forward tax offsets on eligible investments. The maximum benefit amount is capped at a combined tax offset of $200,000 for investors and affiliates per income year.
- Modified Capital Gains Tax (CGT) treatment.
- Qualifying shares that are continuously held for a period between 12 months and 10 years may have their Capital Gains disregarded.
- Capital Losses may be disregarded for shares held for less than 10 years.
How do I qualify as an Early-Stage Innovation Company?
ESIC reports must be lodged annually with the ATO in order to ensure companies are still eligible for ESIC benefits.
To be eligible for ESIC status, your business must:
- Be an Australian business as per the Corporations Act 2001
- Meet the Four Early-Stage Requirements (The Early Stage Test)
- Pass either:
- The 100-point innovation test (objective),
or - The principles-based innovation test (subjective)
- The 100-point innovation test (objective),
The Early Stage Test
When securing investment, your company must also meet four additional criteria in order for your investors to receive their tax incentives. These four criteria are:
- “The company must have been incorporated or registered in the Australian Business Register
- The company (plus any wholly owned subsidiaries of the company) must have total expenses of $1 million or less in the previous income year
- The company (plus any wholly owned subsidiaries of the company) must have assessable income of $200,000 or less in the previous income year
- The company’s equity interests are not listed for quotation in the official list of any stock exchange, either in Australia or a foreign country”
If these requirements are not met when issuing shares to the investor, the investor will have to amend their claims for tax incentives if a claim has been submitted.
100-Point Innovation Test
The 100-point innovation test is the simplest and most utilised qualification method. In this self-assessed test, a business must achieve at least 100 points on a set of criteria provided by the ATO.
These criteria are a set of various items with different point ratings ranging from 25 to 75 points. Examples of the topics included in these criteria include proportions of company expenditure eligible for tax deductions, patents, accelerator programs, and more.
The full list is available from the A.T.O. website.
Principles Based Innovation Test
In comparison, the principles-based innovation test requires a ruling from the ATO as to whether your business qualifies for ESIC status.
Companies applying for ESIC via the principles-based innovation test should use documents such as their business plan, commercialisation strategy or competition analysis to demonstrate the five requirements whilst also highlighting the steps that have been or will be taken towards achieving these requirements:
- “The company must be genuinely focused on developing one or more new or significantly improved innovations for commercialisation
- The business relating to that innovation must have a high growth potential
- The company must demonstrate that it has the potential to be able to successfully scale up that business
- The company must demonstrate that it has the potential to be able to address a broader than local market, including global markets, through that business.
- The company must demonstrate that it has the potential to be able to have competitive advantages for that business”
For a full breakdown on the requirements of the principles-based test for ESICs please refer to the A.T.O. Website. If you need assistance preparing these supporting documents get in touch with POP!
Eligibility Criteria for Early-Stage Investors
In order to qualify as an Early-Stage Investor, the investor must:
- Invest in a qualifying ESIC (as above)
- Not be a widely held company
- Invest $50,000 or less during an income year, or
- Qualify as a Sophisticated Investor
Investors who wish to invest more than $50,000 in qualifying ESICs during an income year must pass a sophisticated investor test under the Corporations Act 2001 in order to maintain eligibility for tax incentives. Qualifying for this status offers the additional benefit of not requiring to be provided with a disclosure document when being offered shares in an ESIC.
POP Business for your ESIC or Investors
POP Business can assist you with your qualification assessment and annual ATO lodgement of the ESIC report:
ESIC Eligibility Review
POP can provide you with an analysis of your company’s eligibility for the ESIC qualification and/or review your self assessment and supporting documentation.
ESIC Preparation & Lodgement
The expert team can provide you with a written analysis of your ESIC assessment with supporting documentation as well as liaise on your behalf with the ATO for your report submission. Your application will be submitted to the ATO.
Accountant’s letters for investors
For investors looking seeking a sophisticated investor certification, POP can review your assets and income to ensure you meet the requirements. We can then provide you with an accountant’s letter certifying your eligibility to invest in ESIC companies.
Please reach out to our friendly accountants on 1300 180 630 or contact us here.
