Early Stage Innovation Company (ESIC) Tax Incentive: A Simple Guide for Australian Entrepreneurs & Investors

Early Stage Innovation Company (ESIC) is an initiative designed by the Australian government, that offers attractive incentives to both companies and investors. In this blog post, we’ll delve into the key aspects of the ESIC scheme, helping you understand how it can benefit your start-up venture, and also for you, “Mr/Ms Investor”, who’s looking at investing into one.

Understanding ESIC:

The ESIC status is granted to eligible companies that are at an early stage of their development. To qualify, your company must meet specific requirements that assess your innovation level and financial viability. Simply put, you need to pass the Early Stage Test, and the Innovation Test

Early Stage Test Criteria:

To meet the early stage test, the company must meet 4 requirements:

1. The company must have been incorporated or registered in the Australia.
2. The company (plus any wholly-owned subsidiaries of the company) must have Total Expenses of $1,000,000 or less in the previous income year.
3. The company (plus any wholly-owned subsidiaries of the company) must have Assessable Income of $200,000 or less in the previous income year.
4. The company is NOT listed in any stock exchange, either in Australia or a foreign country.

Innovation Test:

Your company must pass the Innovation test set by the Australian Taxation Office (ATO), being:

1. The 100-point innovation test, or
2. Principle-based innovation test.

These tests are design to evaluate factors like the uniqueness of your product, business model, or high growth potential.

Benefits for Start-ups:

Investor Attraction: ESIC status makes your business more appealing to investors, as they can get significant tax offsets and benefits by investing in ESIC certified entity.

Benefits For Investors:

1. Tax Offset Benefit: A tax offsets of 20% of the amount invested, capped at AUD 200,000 per investor, per year.
2. Capital Gains Tax Exemption: Investors can also benefit from a capital gains tax exemption on shares held between 1 and 10 years.

Conclusion:

The ESIC scheme presents a significant opportunity for Australian entrepreneurs. By understanding and meeting the eligibility criteria, you can make your start-up more attractive to investors and enjoy considerable tax benefits. Remember, the journey of entrepreneurship is both challenging and rewarding, and leveraging schemes like ESIC can be a game-changer for your business.

It is also worth noting that: In business, you don’t need to know everything, you just need to know enough, then find the right advisors to help you achieve your goals.