Tax break on start-ups could be next big thing
Tax break on start-ups could be next big thing
Investing in start-ups and early stage ventures has always been risky but the federal government’s new tax regime has at least made it more attractive. In 2017 it is an area of investing that may get much more attention now that superannuation tax breaks have been crimped.
The new tax regime mooted in the Turnbull government’s innovation package of a year ago — quietly came into force on July 1 this year and is now beginning to get some attention.
Former Citibank executive Stephen Crowe, who founded early stage investment consultancy and investment platform, ESICHub.com, says the new tax concession regime is “the best news story for Australian business” for some time but he says its introduction was “lost in the noise of elections, Brexit and Mediscare”. Crowe suggests 2017 could see more potential early stage investors including individuals, trusts, partnerships, super funds and small companies, taking a look at the opportunities to take advantage of the more attractive tax concessions.
The new laws are designed to provide easier access to capital for early stage companies by giving investors more attractive after-tax returns.
At the heart of the process is a so-called “ESIC®” — an early stage innovation company which fits certain criteria.
- Under the new measures, investors in an ESIC® from July 1 this year can get a tax credit of 20 per cent of the amount paid for their qualifying investments.
- The 20 per cent tax credit is a non-refundable tax offset which can be a carried forward to offset future tax bills.
- Retail investors can put in a maximum of $50,000 per financial year. (In an interesting twist — apparently to save small investors from blowing too much of their savings on start-ups — the tax concessions disappear entirely if the investor puts more than $50,000 a year into an ESIC® or several ESICs.)
- Qualified “sophisticated” investors are not subject to any total investment cap for ESICs but their annual tax rebate is capped at $200,000 a year. To qualify as “sophisticated”
investors, an investor (including a self-managed super fund) will need to have gross income of more than $250,000 a year in each of the previous two financial years or net assets of at least $2.5 million. They also have to get a certificate issued by a qualified accountant that they meet the requirements of being a “sophisticated” investor which could also include other considerations.
For all investors (retail and sophisticated), there is also an exemption from capital gains tax on any gains made on the sale of shares in the ESIC® between years one and 10. There are other specific conditions required to access the tax concessions.
- To qualify, investors must have bought the new shares in a company that meets the requirements to be an ESIC® immediately after they have been issued.
- The tax concessions do not apply to shares issued under employee share schemes.
- They can apply to the founders of the company themselves — but to access the tax benefits, the investor cannot hold more than 30 per cent of the shares in the ESIC®.
To meet the “early stage” test the company has to comply with four requirements which apply at the time it is issuing shares to the investors. These include being incorporated or registered in the Australian Business Register, having total expenses of $1 million or less in the previous income year, having assessable income of $200,000 or less in the previous income year and the company must not be listed on the ASX or any other stock exchange. The company will also have to meet a “100 point innovation” test or a “principles based innovation” test.
The investors also have to assure themselves that the companies are qualifying ESICs.
Crowe’s ESIC® Hub is an online platform which seeks to advise both high net worth investors and early stage companies on how to access the tax breaks. It also provides a market place for potential investors and entrepreneurs seeking funds to connect.
He believes that as investors and entrepreneurs become more comfortable with the new regime, capital will start to shift to ESICs as an investment vehicle of choice for entrepreneurs, innovators, researchers and investors. But he warns that investing in early stage companies is not for the fainthearted with investors needing to get advice before they hand over their hard-earned money.
This article first appeared in The Australian – Tax break on start-ups could be next big thing
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