What do the Tax Breaks look like for an Investor
What do the Tax Breaks look like for an Investor?
The new capital-raising regime in Australia is whether or not you are an early stage innovation company and that’s obviously a long word we’ve abbreviated that to be an ESIC®. At ESIC® Hub what we’re doing is connecting serious innovators with serious investors. So we are providing an end-to-end solution for early stage companies looking for capital raising and investors in the new environment that we’re working within from the 1st of July.
The investment framework that the investors are now looking at is this investment world. It started on the 1st of July, it’s very early days, you’re going to start seeing a greater engagement and I guess chatting around this concept about that the significance is of the ESIC® world. It’s in place, it had bi-partisan support, and it’s the new world for raising capital and the new investment framework for early stage companies.
The question came about what the tax breaks look like for an investor and I’m sure some of you guys potentially look at investment as well and they are significant. We’ve built a tax saving estimator so your parents, people who are looking to invest in your vehicle could be eligible for these tax breaks so I would encourage you to refer them to this website, there is a bar here where you can look at what your proposed level of investment is as an investor and you can play with this bar and say look…. ‘I want to invest $100,000 in my venture that’s been presented to me’ and it will automatically work out what some of those tax benefits are.
So there’s a tool there, it’s called the ESIC® Tax Saving predictor and fill that questionnaire out if you’re interested in looking at if from an investment point of view. But let’s go specifically to that question.
‘What are the tax breaks?’
They are significant. The first thing is an investor coming into one of your projects. Let’s say you; I’ll take a case study… One of you might be interested in raising $1m for the sake of the exercise, on a valuation of, let’s say $5m just for the sake of the case study. What does that look like in terms of these investment benefits and the new investment framework that applies from 1 July? It looks like this.
New capital must be issued, that’s easy because you are issuing expansion capital, that’s why you need the capital to grow and I guess develop your project into a sustainable business and to take it to that stage. That $1m provided it comes from a sophisticated investor has the following tax benefits.
A 20% non-refundable tax rebate. So a 20% non-refundable tax rebate. What does that mean?
If you are a partner in a law firm or an accounting firm earning a lot of money and you have an income of $1m and a tax liability of say, $400k if you put $1m into an ESIC® the Tax Office (once the certification process has gone through our hub procedure) the Tax Office will effectively give that investor a tax credit of $200k. So their tax liability will go from being $400k to $200k – you can immediately see a 20% after-tax reduction in the cost of investment. Does that make sense?
The second benefit is a very significant capital gains tax leg up. If that $1m investment by a partner in a law firm or an accounting firm turns into the next Google, and I hope it does for all of you, if that $1m is worth $50m and those shares are sold within years 1 and 10, the capital gain $50m – $1m, would ordinarily be subject to capital gains tax in Australia and a significant rate of tax would apply. As a consequence of ensuring that you are ESIC® at the time of the investment, that is all capital gains tax-free and tax-free. Significant benefit. So let’s re-cap:
A 20% non-refundable tax offset that can be carried forward indefinitely by the investor.
A capital gains tax exemption on any gains made on the disposal of shares in your growth company.
Client approaches accountant for assistance in setting up new business and access to $seed capital.
ESIC Hub conducts due diligence on client and reports back to accountant at meeting.
ESIC pathway to capital raising agreed and implementation begins. Sarah raises enough capital for the 2-year development runway. A happy client.
You and Us working together
ESIC® Hub is Australia’s first and only online platform dedicated to serving the needs of the early-stage community. We offer you an effective pathway to efficiently allocate resources by utilising our deep technical knowledge and expertise to ensure client-centric outcomes are achieved.
We offer accounting professionals a choice of service models, all with a client-centric outcome to complement your trusted relationship and service offering to your clients. We can arrange for an introduction or a presentation where we go through the tax laws surrounding ESICs to give you a better understanding of how these new laws can benefit your early-stage innovator clients.
At ESIC® Hub, we are excited to see how we can complement your advisory work to clients. We have an adviser sign-up questionnaire on our website that allows you to communicate with us and keep up-to-date with the ESIC® legislation and developments.
We look forward to working with you.