As a founder, you might have heard the term "Early Stage Innovation Company" or ESIC. But what exactly does it mean, and why does it matter for you?
An ESIC is a specific classification for startups in Australia. It's designed to encourage investment in innovative early-stage companies by providing tax incentives to investors. To qualify as an ESIC, a company needs to meet certain requirements set by the Australian Taxation Office (ATO). These requirements focus on the company’s stage of development, level of innovation, and growth potential.
Why ESIC status matters
The main benefit of being recognised as an ESIC is the tax incentives available to your investors. By offering these incentives, the Australian government aims to support and accelerate the growth of innovative startups. Here’s a quick breakdown of the incentives:
- Tax offset for investors: Investors can receive a 20% tax offset on the amount they invest, up to a maximum offset of $200,000 per year. This can significantly reduce their tax liability.
- Capital gains tax (CGT) exemption: If investors hold shares in an ESIC for between one and ten years, they won’t have to pay CGT on profits from selling those shares.
These incentives make ESICs more attractive to potential investors, which can help startups raise the capital they need to grow and innovate.
Qualifying as an ESIC
To be recognised as an ESIC, a company needs to pass two key tests:
1. The Early Stage Test
- Your company must be less than three years old (although in some cases, up to six years is allowed).
- It must have total expenses of $1 million or less in the previous income year.
- The company must have total income of $200,000 or less in the previous income year (excluding grants).
2. The Innovation Test
There are two pathways here: the Principles-based test and the 100-point innovation test:
- Principles-based Test: Your company must prove it has potential for high growth, scalability, international competitiveness, and innovation. This test is more subjective and requires a narrative demonstrating how your company meets these criteria.
- 100-point innovation test: Your company earns points based on various innovation-related criteria, such as receiving an R&D tax incentive, holding a patent, or being accepted into an accelerator program. You need to accumulate at least 100 points to qualify through this test.
How to apply for ESIC status
You don’t have to submit an application to the ATO for ESIC status. Instead, it's the responsibility of you and your investors to ensure the company meets the ESIC criteria for their tax return. While it's self-assessed, it’s wise to consult with a tax advisor or legal professional to make sure you’re compliant.
Key takeaways
- Understand the criteria: Knowing the Early Stage and Innovation Tests will help you determine if your company qualifies.
- Document everything: Keep thorough records to demonstrate that you meet the ESIC criteria, especially if you plan to self-assess.
- Seek professional advice: Given the tax implications, consulting with a professional can ensure you and your investors maximize the benefits.
By understanding the ESIC framework, you can position your startup as an attractive investment opportunity, gaining a crucial edge in the competitive world of early-stage funding.
