ESIC – The Art of Making your Startup a Tax-Effective Investment

Business partnership and success concept. Mixed media.

Make an investor’s day by getting your venture the ESIC status. Learn a bit more about the benefits of ESIC and what it could mean for your investors.

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

Different asset classes with different risk profiles and yields abound. Investments in new startups are often discussed as one of the most risky of all – particularly for third parties without insider level of information. The Australian government is seeking to reverse this perspective since it is these same innovative ventures that will lead to jobs of the future. 

As part of the 2015 ‘ideas boom’ movement, the government cast a spotlight for savvy investors onto the startup scene through the Early Stage Innovation Company (ESIC) tax incentive scheme.

The benefits to ESIC

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 obtaining 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

An angel investor befriends a local startupNetBux, after seeing the founder’s pitch during a conference. In the discussions around investment in NetBux, the two parties agree to a $50,000 investment in respect of 5% of the startup company as part of a seed round.  

When it comes to doing the annual tax return, the angel investor finds that their taxable income of $180,000 should roughly equate to a tax bill of $57k. After a thorough review of investments for the year, the investor is later advised that the $50,000 investment was eligible for the ESIC concessions, allowing for an additional 20% in tax offsets to be included in the tax return. With additional tax savings of $10,000 the investor is already part way off to the next angel investment.  

After 7 years of outstanding year on year growth, NetBux has become an established player in the fintech scene and gets acquired by a US conglomerate. The angel investor decides to part with their stake as part of the buyout, and makes $820,000 from the initial investment of $50,000.  

The net capital gain of $770,000 is completely tax-free owing to the ESIC status – whereas under normal circumstances for traditional investments like property the capital gain could have amounted to another $179,025 in tax – definitely a big win for an early investor.  

Startups wanting to obtain the popular ESIC investment status will find that the criteria can based on a rather versatile yet significant 100 points check. Highly favoured criteria includes the eligible expenditure under the R&D Tax Incentive, Accelerating Commercialisation along with 3rd party investors or participating in an accelerator.

Fullstack helps startups obtain a tax determination on their eligibility for the ESIC status and implements the tax break for investors in their tax return. For a complimentary discussion about the ESIC tax concessions and how they could apply to you contact the Fullstack Advisory team.

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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech & online companies.

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