The ESIC regimes has many tax benefits that can incentivise investors. As such, founders should be aware of the ESIC eligibility for startups, particularly the various criteria such as the 100 point innovation or principles based test.
Does my business qualify for ESIC? It’s a question we get often, so we’ve put together a comprehensive checklist so you can keep your investors informed. Early Stage Innovation Companies (ESIC) offer a unique investment opportunity and have the effect of de-risking on tax exposures. In our experience it can often be the deciding factor in getting seed or venture capital investment onboard.
How does my startup qualify for ESIC?
- A company will qualify as an ESIC if it meets both:
- The early stage test and
- either the 100-point innovation test or Principles-based innovation test
The Early stage test
- The company must satisfy the four requirements.
- Company must be incorporated in Australia
- The company plus any subsidiary must have total expenses of less than $1 million in the previous financial year
- The company plus any subsidiary must have total income of less than $200,000 in the previous financial year
- Company must not be listed
100-point innovation test
The company must obtain at least 100 points under the criteria below.
- At least 50% of the company’s expenses for the prior year are eligible notional deductions for the R&D Tax Incentive – e.g. significant development expenses, salaries, subscriptions.
- The company has received an Accelerating Commercialisation Grant
- At least 15% but less than 50% of the company’s expenses for the prior year are eligible notional deductions for the R&D Tax Incentive – e.g. significant development expenses, salaries, subscriptions.
- The company has completed or is undertaking an eligible accelerator program
- One or more third parties have previously paid a total of at least $50,000 for the issue of new shares in the company
- The company has enforceable rights on an innovation i.e. a standard patent, a plant breeder’s right, international IP
- The company has enforceable rights on an innovation i.e. an innovation patent, a design right.
The company has a written agreement to co-develop and commercialise an innovation with either an institution listed on the Higher Education Funding Act or an entity registered as a Research Service Provider.
Principles-based innovation test
- The company must satisfy the five requirements.
- The company must be genuinely focused on developing one or more new or significantly improved innovations for commercialisation.
- The business must have high growth potential i.e. a serviceable market
- The company must demonstrate it can scale (to meet that serviceable market)
- The company must demonstrate it can meet a broader than local market
- The company must demonstrate competitive advantages
The nature of the Principles-based Innovation Test is more subjective in its approach and can be interpreted differently by different assessors at the ATO.
It is for this reason the 100-point test should be relied on as a litmus test for access to the ESIC concessions in general as many of the requirements that can be readily confirmed will also check off requirements for the early stage and principles-based test.
An ATO private ruling outlining your circumstances, and the application of law may help to provide your investors some more confidence around the ATO’s perspective here.
The above points are a summary only so for any areas of uncertainty please speak to your Fullstack advisor.
For an investor to be entitled to the ESIC tax offset, the company must qualify as an early stage innovation company (ESIC) immediately after the new shares are issued to the investor. If you need help with identifying if your business is qualified reach out to the seasoned tax accountants at Fullstack whom can also assist with a straightforward process for implementing ESIC where eligible.