Early Stage Innovation Company investor tax breaks misunderstood by founders, investors
This is a recent interview held with Michael, who has diligently researched the current early stage funding environment and conveyed the many misunderstandings that exist. The ESIC® investment framework is available if properly accessed using expert ESIC® advice.
ESIC® Hub is hosting a series of information sessions to benefit the early stage company and early stage investor community in its understanding of the funding, tax savings and strategies available to unlock the ESIC® opportunity box.
The Government’s generous tax breaks for investors in innovative startups appear to be poorly understood, with many founders unaware they exist and many investors insisting on private rulings from the Australian Tax Office in what was designed as a self-assessment system.
Under laws which came in to force on July 1, 2016, investors in a qualifying ‘early stage innovation company’ (ESIC®) are entitled to an upfront 20 percent non-refundable tax offset (capped at $200,000 per investor per year for ‘sophisticated investors’ and $50,000 for other investors), as well as a 10 year capital gains tax exemption for investments held at least 12 months.
The incentives, costed at $104 million over four years in the Government’s National Innovation & Science Agenda in 2015, were hailed at the time as “the most generous in the world” by Alex McCauley, the head of startup peak body StartupAUS. Yet it seems many of his constituents didn’t get the memo.
“Most of the startups I have discussed fundraising within the last six months do not even mention ESIC® in their current fundraising documents, so awareness at the startup level is low,” said Trevor Townsend, the managing director of Startupbootcamp Melbourne, an accelerator for early-stage firms.
Stephen Crowe, founder of ESIC Hub, said too many founders were wasting time seeking ATO private rulings on their ESIC® status. Being ESIC® aware is a critical early stage step for founders seeking early stage capital. Being ESIC® Ready with ESIC® Hub’s expert advisers will accelerate your early stage capital raising. The quickest way to know your ESIC® status is to spend 5-8 minutes completing our free ESIC Predictor as a starting point.
The lack of awareness of the investor tax breaks was compounded by poor understanding of the incentives by other founders and investors said Stephen Crowe, founder of ESIC® Hub, a consultancy which claims to help startups become “ESIC® ready” and introduces them to potential investors.
While poorly sold, the ESIC® investor tax breaks were enshrined in “strongly written legislation” and most quality startups should be able to qualify using its 100-point innovation test, Mr Crowe said, which awards points for milestones achieved such as an Accelerating Commercialisation Grant, significant expenditure on research and development or securing patents, or entry to an eligible accelerator program.
There is also a principles-based test available to startups unable to pass the 100-point test, a subjective test which probes whether a startup is genuinely innovative, can scale globally and has a competitive advantage. It irked Mr Crowe that many founders were being advised to seek a private ruling from the Australian Tax Office on whether their startup qualified as an ESIC® via this ESIC Predictor test.
“Since when is it the ATO’s job to decide which are the innovative companies that will transform our economy?” he told The Australian Financial Review.
“I don’t blame the ATO, they’ve been put in an awkward position. It’s a terrible abrogation of responsibility by the advisors that take startups to the ATO, they just want to take the founders’ money and create a no-risk situation for themselves.”
He noted the private rulings did not insulate the startup from a future audit and that the ESIC® status could be revoked if circumstances had changed for the investor or investee.
Angel investor Creel Price of Investible said while a private ATO ruling was preferred, he was still comfortable with investees that self-assessed against the 100-point test as it was clearly auditable.
Investors seeking exposure to early stage investment opportunities should register with ESIC® Hub
Federal innovation minister Arthur Sinodinos is yet to respond to a request for comment on the Government’s sales job on the ESIC investor tax breaks.
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