Qualifying for the ESIC concessions
A company will be an early stage innovation company at a particular time (the “test time”) in an income year if all of the following are met:
1. Early Stage: At the test time, the company must satisfy all of:
- the company was:
- incorporated in Australia within the last 3 income years, or
- incorporated within the last 6 income years and (across the last 3 of those years) it and its 100% subsidiaries incurred total expenses of $1m or less, or
- registered in the ABR within the last 3 income years; and
- the company and its 100% subsidiaries incurred total expenses of $1m or less in the income year before the current year; and
- the company and its 100% subsidiaries had total assessable income of $200,000 or less in the income year before the current year; and
- at the test time, none of its equity interests are listed for quotation on any stock exchange (Australia or foreign).
- the company was:
2. Innovation: The company must satisfy either:
- 100-point innovation test. This requires a specified level of R&D grants being available to the company or the company receiving certain government grants or participating in certain accelerator programs (see below); or
- The principles-based test, i.e. the company is (among other things) genuinely focussed on developing for commercialisation new or significantly improved products/processes/services/methods, with high growth potential, ability to scale, address a broader than local market (including global), and have competitive advantages. This subjective test runs the risk of the Commissioner of Taxation taking a different perspective on any one of these issues than you or the company and thereby denying the ESIC tax concessions.
The 100 innovation points can be obtained from the following activities:
| Item | Points | Innovation criteria |
| 1 | 75 | At least 50% of the company’s total expenses for the previous income year is expenditure that the company can notionally deduct for that income year under section 355 – 205 (about R&D expenditure). |
| 2 | 75 | The company has received an Accelerating Commercialisation Grant under the program administered by the Commonwealth known as the Entrepreneurs’ Programme. |
| 3 | 50 | At least 15%, but less than 50%, of the company’s total expenses for the previous income year is expenditure that the company can notionally deduct for that income year under section 355 – 205 (about R&D expenditure). |
| 4 | 50 | (a) the company has completed or is undertaking an accelerator program that: (i) provides time – limited support for entrepreneurs with start – up businesses; and (ii) is provided to entrepreneurs that are selected in an open, independent and competitive manner; and (b) the entity providing that program has been providing that, or other accelerator programs for entrepreneurs, for at least 6 months; and (c) such programs have been completed by at least one cohort of entrepreneurs. |
| 5 | 50 | (a) a total of at least $50,000 has been paid for * equity interests that are * shares in the company; and (b) the company issued those shares to one or more entities that: (i) were not * associates of the company immediately before the issue of those shares; and (ii) did not * acquire those shares primarily to assist another entity become entitled to a * tax offset (or a modified CGT treatment) under this Subdivision; and (c) the company issued those shares at least one day before the test time. |
| 6 | 50 | (a) the company has rights (including equitable rights) under a * Commonwealth law as: (i) the patentee, or a licensee, of a standard patent; or (ii) the owner, or a licensee, of a plant breeder’s right; granted in Australia within the last 5 years (ending at the test time); or (b) the company has equivalent rights under a * foreign law. |
| 7 | 25 | Unless item 6 applies to the company at the test time: (a) the company has rights (including equitable rights) under a * Commonwealth law as: (i) the patentee, or a licensee, of an innovation patent granted and certified in Australia; or (ii) the owner, or a licensee, of a registered design registered in Australia; within the last 5 years (ending at the test time); or (b) the company has equivalent rights under a * foreign law. |
| 8 | 25 | The company has a written agreement with: (a) an institution or body listed in Schedule 1 to the Higher Education Funding Act 1988 (about institutions or bodies eligible for special research assistance); or (b) an entity registered under section 29A of the Industry Research and Development Act 1986 (about research service providers); to co – develop and commercialise a new, or significantly improved, product, process, service or marketing or organisational method. |
Tax Concessions for Qualifying ESIC investment
Where the ESIC tax concessions are available then the investor can:
- Claim a 20% tax offset
- Pay no CGT on the ultimate sale of the investment.
Tax Offset
You are entitled to a tax offset for an income year if:
- you are not a trust, a partnership, an ESVCLP or a widely held company or a 100% subsidiary of a widely held company; and
- at a particular time during the income year, a company issues you with equity interests that are shares in the company; and
- subsection 360-40(1) (about early stage innovation companies) applies to the company immediately after that time; and
- neither you nor the company is an affiliate of each other at that time; and
- the issue of those shares is not an acquisition of ESS interests under an employee share scheme; and
- immediately after the issue of those shares, you do not hold equity interests in the company, or in an entity connected with the company, that carry the right to receive more than 30% of any distribution of income by the company or the entity or receive more than 30% of any distribution of capital by the company or the entity or exercise, or control the exercise of, more than 30% of the total voting power in the company or the entity.
A beneficiary of a trust is entitled to a tax offset for the income year if:
- the trust would be entitled to a tax offset, under this section, for the income year if the trust were an individual; and
- the beneficiary is not a widely held company or a 100% subsidiary of a widely held company.
An object of a discretionary trust is treated as a member for ESIC offset purposes, as long as they are a beneficiary under the trust deed at the end of the income year: Private Ruling 1052012689133.
The trustee must comply with the notice requirements in s 360‑30 so that the beneficiary can determine their share of the tax offset. This involves the trustee making a written determination allocating a share of the ESIC offset to each relevant beneficiary within 3 months of the end of the income year (or within any extended time allowed by the Commissioner) and must contain enough information for the beneficiary to work out their share of the offset. The offset can be allocated to any beneficiary who is a potential beneficiary of the trust as to income or capital, even if that beneficiary does not receive any income or capital in that year.
The tax offset is 20% of the qualifying investment, capped at $200,000. The offset is a non‑refundable, carry‑forward tax offset, so it can only reduce the beneficiary’s tax liability (including any tax on other income, including trust distributions) and can be carried forward to later years if not fully used.
CGT
The entity may disregard any capital gain it makes from any CGT event happening in relation to the share if:
(a) the entity has continuously held the share since its issue; and
(b) the CGT event happens on or after the first anniversary, but before the tenth anniversary, of the issue of the share.
