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November 18, 2020

Are you an early stage investor? Then you may be eligible for tax credit that you didn't even know about.

Image Credit: Anthill Online

According to the ATO, if you invest in a qualifying Early Stage Innovation Company (ESIC) you may be eligible for a tax incentive for early stage investors. This is sometimes more commonly known as angel investors. This initiative was created by the National Innovation and Science Agenda (NISA), in order to encourage investment into innovative and growing businesses. They do this by providing a concessional tax treatment to the aligned investors. The tax incentive program is designed to encourage investing in start-ups by giving the investors tax breaks when they give capital to small innovating companies.
How the program works is that it gives investors:

  1. Tax Offset - 20% non-refundable tax offset on investments. This is limiteds to $200,000 per investor per year.
  2. Capital Gains - This gives investors a 10 year exemption on the capital gains tax, only if the supplied investments are held for at least 3 years.

In order for investors to actually be eligible and qualify for the tax benefit treatment there are a number of stages they need to pass which we have outlined below for your convenience.

To qualify for the tax incentive for early stage investors, the company you invest in must qualify as an early stage innovation company. (ESIC) But what is an ESIC and how does a company qualify?
Well, a ESIC or Early Stage Innovation Company, is a start-up that has a high amount of innovation and growth capacity. It also has to have less than $200,000 in revenue and less than $1 million in their expenses.

To be an eligible ESIC the company also has to meet 2 requirements which are outlined below.

Early Stage Test - In this Early Stage Test their are 4 requirements:

  1. Incorporated - This means that the business is classified as a company or an Australian registered business (ABR)
  2. Expenses - The company must have less than $1million in total expenses
  3. Income - The company must be less than $200,000 in assessable income
  4. Listed - The company must not be listed on the ASX

100 point Innovation Test - This 100 points innovation test is a self-assessed objective test, where the business needs to make up 100 points of the following:
Worth 75 points:

  1. Accelerating Commercialisation - The ESIC has received a grant for accelerating commercialisation grant
  2. R&D Grant - 50% of the ESIC expenses from the previous year are eligible for the notional deduction for the R&D tax incentive.

Worth 50 points:

  1. R&D Grant - 15% of the ESIC expenses from the previous year are eligible for the notional deduction for the R&D tax incentive.
  2. Accelerator Program - participated in an eligible accelerator program
  3. New Shares -
  4. Patent - ESIC has standard patent or alternatively a plant breeder’s right

Worth 25 points:

  1. Patent - ESIC has a right to innovate or design
  2. Collaboration - an agreement with a research institution to co-develop and commercialise an innovation.

Once the business has eligibility established they then have two options to qualify as ESIC:

  1. Innovation Test - Self prepared or using a consultant, the business will need to prepare the necessary documentation to support your innovation status.
  2. ATO Ruling - a potential investor or ESIC can seek a ruling from the Australian Tax Office, in order to confirm the status, however this is not mandatory.

It is important that the lodges report before the end of the financial year, so that the investor can claim the tax benefit.
For more information and Assistance in eligibility or qualification on grants and tax incentives: contact the Mark Bouw Group: Or visit our website:

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