Early-Stage Innovation Company (ESIC)Tax Incentives
The Early Stage Innovation Company (ESIC) tax incentive is a great benefit for investors in early-stage companies and for early-stage companies to attract investors. Innercode can assist both investors and companies to determine if they are eligible for the ESIC benefit. Innercode helps clients engage experts who can navigate the complexities of the scheme to provide advice as well assistance where ATO private rulings or letters of advice are required.
How can early-stage innovation company tax incentives benefit software and tech companies?
Since July 2016, the Early Stage Innovation Company (ESIC) tax incentive program has been available to encourage investments in small Australian innovation companies with high-growth potential. With ESIC, qualifying investors may receive a tax offset and a modified capital gains tax (CGT) treatment. The tax offset is generally equal to 20% of what the investor paid (including non-cash benefits) in exchange for the qualifying shares. Investors and their affiliates can be eligible to a maximum of $200,000 offset per income year. On the other hand, under the modified CGT treatment, capital gains of investors and their affiliates on qualifying shares that are continuously held for at least a year but not more than 10 years may be disregarded.
Your software and tech company can attract more investors if it meets the requirements of an ESIC. To qualify as one, your company should not be considered as a foreign company under the Corporations Act 2001. Furthermore, your company should pass the early-stage test and either the 100-point innovation test or principles-based innovation test
Early Stage Test
1. Your company must be incorporated or registered in the Australian Business Register
2. Your company and your wholly-owned subsidiaries’ expenses did not exceed $1 million in the previous income year
3. Your company and your wholly-owned subsidiaries’ assessable income did not exceed $200,000 in the previous income year
4. Your company’s equity interest is not listed in the official list of any stock exchange in Australia or abroad.
100 – point innovation test for software and tech companies
For most software and technology companies, the simplest way to determine eligibility is through the 100-point innovation test. For instance, your company can get 50 points if at least 15% but not more than 50% of your total expenses for the previous year are eligible notional deductions for research and development (R&D) tax incentives. If your R&D-related notional deductions are above 50%, you can get as much as 75 points in the innovation test.
Another way for companies who conducted eligible R&D activities to get points is through their enforceable rights on innovation through a standard patent or an equivalent intellectual property right granted overseas. Meeting these criteria would give your company 50 points. Moreover, if your company holds an innovation patent or a design right, you may be able to get 25 points.
Principles-based innovation test
To pass the principles-based innovation test, your company must meet the following five requirements:
1. Be genuinely focused on developing one or more new or significantly improved innovations for commercialisation. If your company was able to claim an R&D tax incentive, this may support the claim that your company produced an innovative product for sale.
2. Be able to demonstrate the innovation in your product that must have high growth potential.
3. Be able to demonstrate the company’s potential to successfully scale up the business relating to innovation.
4. Be able to demonstrate the company’s potential to address a market beyond the local one through the relevant business.
5. Be able to show the potential to have a competitive edge for the relevant business.
To meet the requirements above, supporting documentation would need to be provided. Documentation such as a business plan, commercialisation strategy, or competition analysis, could form a part of meeting the extensive requirements of the principles-based innovation test.
If you need help in determining your company’s eligibility as an ESIC, we at Innercode will be happy to schedule a call with you to discuss how your company meets these requirements.