Investors financing eligible early stage innovation companies (ESICs) may be entitled to tax concessions and capital gains tax exemptions. Unlike many other merit-based grant schemes, ESIC investor incentives are open to investors in any and all companies that meet the eligibility criteria. Therefore, qualifying as an ESIC may represent a significant drawcard for your cleantech start-up when it comes to potential and current early stage investors.
What does it take to qualify as an ESIC?
For a cleantech start-up to qualify for funding as an ESIC, it must pass an “early stage” test and an “innovation” test.
Early stage test
Your company will be considered “early stage” if it:
- Had expenditure of $1 million or less in the previous income year;
- Had assessable income of $200,000 or less in the previous income year;
- Is not listed on any stock exchange; and
- Was incorporated in Australia, or registered in the Australian Business Register, within the last 3 years; or
Was incorporated in Australia within the last 6 years and had a total expenditure in the previous 3 years not exceeding $1 million.
Your company will be considered an innovation company if it:
- Satisfies the gateway or “100 point innovation” test; or
- Satisfies a principles-based test.
Both of these tests are self-assessments. However, the ESIC or a potential investor can request that the Australian Tax Office (ATO) provide a determination on whether the above tests are satisfied in a particular case.
The gateway “100 point” test
The gateway test is an objective points-based system to assess whether a company is innovating. A company must attain at least 100 points from the test table provided by the ATO, which sets out activities such as:
- Level of expenses for research and development; and
- Whether the company has received an Accelerating Commercialisation Grant; and
- Whether the company has any enforceable innovation IP rights, such as recently granted patent(s),
and the relevant number of points each activity earns.
The principles-based test
The principles-based test has five requirements:
- The company must be genuinely focused on developing one or more new, or significantly improved, innovations such as products, processes, services, or marketing/organisational methods, for commercialisation;
- The business relating to that innovation must have high growth potential;
- The company must demonstrate the potential to be successfully scaled up;
- The company must demonstrate potential to address a broader than local market, including global markets; and
- The company must demonstrate the potential for competitive advantages for that business.
Further detail on qualifying via these principles is available here.
How can Spruson & Ferguson help Australian cleantech start-ups meet the ESIC criteria?
As noted above, innovation “points” are available for companies having enforceable rights through an Australian (standard) patent granted within the last five years, an equivalent right in another country, or where the company holds a license to such IP owned by another party.
Spruson & Ferguson specialise in creating and developing IP portfolios, and turning ideas into intellectual assets for start-ups, especially those operating in the cleantech space. Spruson & Ferguson can assist start-ups throughout the process from “mind to market”, from drafting patent applications, through to national and international patent prosecution, as well as patent enforcement and patent portfolio management.
How can Glasshouse Advisory help Australian start-ups determine their ESIC eligibility?
Under the innovation test, if at least 50% of a company’s total expenses for the previous income year are eligible notional deductions for the research and development (R&D) tax incentive, the company will attain 75 points out of the required 100 points under the ESIC criteria.
Our related consultancy, Glasshouse Advisory, specialises in assisting companies in gaining access to Government grants and incentives, including the R&D tax incentive. In this regard, Glasshouse Advisory can assist start-ups to evaluate their prior income year’s activities and associated eligible expenditure for the purposes of preparing and lodging an eligible R&D tax incentive claim.
The advantage of this process is that the successful registration of a company’s R&D tax incentive claim may not only earn up to 75 points against the ESIC innovation test criteria, but furthermore, may provide access to a refundable R&D tax rebate of up to 43.5% of eligible R&D expenditure. This may provide much needed funding for further development activities.
Please contact Spruson & Ferguson’s dedicated cleantech team or the authors below for a referral.
Who is eligible for an ESIC tax offset?
Eligible investors are those who:
- directly invest in a qualifying ESIC by way of purchasing shares immediately after they are issued;
- are not a widely-held company; and
- are either:
- an entity that meets the tests for a sophisticated or professional investor pursuant to subsections 8, 10 or 11 of section 708 of the Corporations Act 2001; or
- a retail (or non-sophisticated) investor that has invested $50,000 or less in ESICs the income year.
What are the tax incentives for eligible investors?
The incentives are:
- a 20 per cent non-refundable carry-forward tax offset on amounts invested in qualifying ESICs, with the offset capped at $200,000 per investor (and their affiliates) per year; and
- a modified capital gains tax treatment for investments in qualifying shares in an ESIC held for between 1 and 10 years, provided that the shares held do not constitute more than a 30 % interest in the ESIC.
What are the reporting requirements?
If your eligible ESIC issues any new shares during a financial year that could lead to an investor being entitled to access the early stage investor tax incentives, an ESIC Report must be prepared and submitted to the ATO at the latest by 31 July to account for the preceding financial year.