The ATO provides tax incentives for early stage investors, sometimes referred to as ‘angel investors’, that invest in start up companies. These incentives include a non-refundable tax offset of 20% of the amount invested and the disregarding of certain capital gains made on the investment.
For an investor to be entitled to the tax incentives, the company must qualify as an early stage innovation company (ESIC) immediately after it issues shares to an investor.
For a company to qualify as an ESIC it must not be a foreign company and must meet the following two tests:
- The early stage test
- Either the 100-point innovation test or principles-based innovation test
Early stage test
To meet this test the company must meet the following four requirements immediately after issuing the shares to the investor:
- The company must have been incorporated or registered in the Australian Business Register
- The company must have total expenses of $1 million or less in the previous income year
- The company must have assessable income of $200,000 or less in the previous income year
- The company’s equity interests (shares or units) are not listed on an Australian or foreign country stock exchange
100-point innovation test
To qualify under this test, the company must obtain at least 100 points by meeting various innovation criteria listed on ATO website. These criteria include activities that relate to start-ups including expenditure on Research and Development, registering patents, and issuing share capital. In practice this is likely to be the simplest way to determine eligibility when compared to alternate principles-based innovation test.
Principles-based innovation test
To meet this test the company must meet five requirements and demonstrate how it meets them using existing documentation, such as business plan or competition analysis:
- The company must be genuinely focused on developing significantly improved innovations
- The related business has high growth potential
- The company must demonstrate that it has potential to be able to successfully scale up this business
- The company must demonstrate that it has the potential to address a broader market including global markets
- The company must demonstrate it has the potential to be able to have competitive advantage
Author: Elena Grishina