What is an ESIC? An Early Stage Innovation Company (ESIC) is a company that has started in the last 3 years, has expenses of less than $1 million and has assessable income of less than $200k. It is also involved in innovation.
Effective from 01 July 2016, sophisticated investors that invest in Early Stage Innovation Companies (ESICs) are eligible for a 20% tax offset. This applies to amounts invested up to $200k per annum. Non-sophisticated investors can also access this limited to a tax offset of $50,000 investment per year.
This means that if a sophisticated angel investor invests $200k in an ESIC they get a $40k tax offset. This make end of financial year a particularly attractive time to be raising capital.
To make it even more attractive for investors: They get a 10-year exemption from Capital Gains Tax (if they’ve held the shares for at least 12 months). This means that any gains investors make on the sale of these shares will be tax free.
So how do startups "become" an ESIC?
A company will qualify as an ESIC if it meets both:
- the early stage test (<3 years old, expenses<$1 million, income<$200k) AND
Most companies can make their own determination if they pass the 100-point test which is based on points allocated to whether you're doing a combination of R&D, received an Accelerating Commercialisation grant, in an accelerator, raised $50k or have patents.
If you don't pass the 100-point test an need to rely on the principles-based test it's a little more subjective and you may need to have an independent outside view of eligibility.
And for certainty for your investors it may also pay to have the ATO provide a pre-approval of your circumstances.