ESIC - Becoming a Standout Startup for Investors - Fullstack Advisory

ESIC – Becoming a Standout Startup for Investors

ESIC-investment
Nov 14 2017

ESIC – Becoming a Standout Startup for Investors

Today’s investors truly are spoilt for choice when it comes to spending their savings.

Investments littered across different asset classes with different risk profiles and yields abound. Bonds and property traditionally are seen to be the least ‘risky’ whereas more modern investments such as ETFs or cryptocurrencies like Bitcoin carry a higher level of perceived risk. Investments in new startups are often discussed as one of the most risky of all – particularly for third parties without the ‘insider’ level of background information. The Australian government is seeking to reverse this conservative perspective – particularly as it is these same innovative startups that will lead to the industries and jobs of the future.

As part of the ‘ideas boom’ movement, the government has cast a spotlight for savvy investors onto the burgeoning startup scene through the Early Stage Innovation Company (ESIC) tax incentive scheme.

The main drawcard for investors involves a ‘tax break’ of 20% equal to the investment made towards a qualifying ESIC share in a startup. This generous concession assists the investor and affiliates to invest up to $1 million whilst making full use of the incentive.

The benefits don’t stop there – startups with ESIC status are also privy to relaxed CGT rules. Investors holding the shares between 12 months and 10 years don’t incur capital gains (or losses) during this time.

If we were to see the ESIC in action it might occur like thus….

James, a seasoned but casual investor becomes a passionate fan of a local startup, NetBux, after seeing the founder’s pitch during a conference. In the discussions around investment in NetBux, the two parties agree to a $40,000 investment in respect of 5% of the startup company as part of a Series A round.

When it comes to doing his annual tax return for the 2017 financial year, James finds from an online tax calculator that his taxable income of $180,000 should roughly equate to a tax bill of $57,832. After a thorough review of his investments for the year, James is later advised by Fulllstack that his $40,000 investment was eligible for the ESIC concessions, allowing for an additional 20% in tax offsets be included in his tax return. The tax savings here amount to $8,000 – definitely welcome news to James who uses the tax savings to purchase some extra bitcoin!

After 7 years of outstanding year on year growth, NetBux has become an established player in the fintech scene – particularly after finding a lot of traction with its significant user base in South-East Asia. The upcoming IPO will help cement its position here and help them launch into the US market where a local competitor has already made some headway. James decides to part with his stake as part of the IPO, and makes $820,000 from his initial investment of $40,000.

The net capital gain of $780,000 is completely tax-free owing to the ESIC status – whereas under normal circumstances for traditional investments like property or BHP the capital gain could have amounted to another $175,500 in tax – a definite boon for the startup movement.

Startups wanting to obtain the popular ESIC investment status will find that the criteria is based on a rather significant but slightly versatile 100 points check. Highly favoured criteria include having the eligible expenditure for the R&D Tax Incentive, obtaining the Accelerating Commercialisation grant, the receipt of 3rd party investments or participating in an accelerator program. 

Fullstack helps startups make a determination on their eligibility for the ESIC status and incorporates the tax break for investors in their tax situation. For a complimentary discussion about the ESIC tax concessions and how they could apply to you contact the Fullstack Advisory team on 1300 887 627 or via email at info@fullstack.com.au.

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