Innovation Statement: The tax implications you need to know

In it’s innovation statement released last year, the Government sought to remove the fear of failure by offering tax breaks and changes to insolvency laws to provide greater flexibility for entrepreneurs and investors in innovative start ups. Two of these key tax measures were recently legislated.

1. Tax Incentives for Innovation and ESIC’s

This new legislation is designed to encourage new investment in Australian Early State Innovation Companies (ESIC), through the following tax concessions for eligible investors:

  • Upfront 20% non-refundable tax offset on investment capped at $200,000 per investor, per year. Allowing investors to reduce their overall tax liability for the relevant year.
  • A 10 year capital gains tax exemption for investments held for 12 months or more.

These generous tax concessions give qualifying ESIC’s an opportunity to reduce the negative bias toward risk-taking businesses and allow them to test new ideas, innovate and make them an attractive investment option.

What is an ESIC?

A company will generally qualify as ‘early stage’ if it is:

  • unlisted company
  • less than 3 years old
  • has expenses of less than $1 million and an assessable income of less than $200,000 in the last financial year.

Companies up to six years old may also qualify but are subject to more expenditure restrictions.

Engaged in innovation

The company also needs to be ‘engaged in innovation’ which is established either through a principles based test or a points based test under a self assessment.

  • Principles Test: measures innovation factors relating to the business. Does it have the potential for high growth, is it scalable, can it address a broader market and does it have a competitive advantage?
  • 100 point Innovation Test: allows the company to accumulate points according to a table of objective innovation criteria.

2. Tax offsets for Early Stage Venture Capital Limited Partnerships

A 10% non-refundable tax offset for capital invested in new Early Stage Venture Capital Limited Partnerships (ESVCLP’s) has been introduced and with it an increase in the cap on committed capital from $100 million to $200 million for new ESVCLP’s.

The Government also plans to remove the requirement for ESVCLP’s to divest a company when its value exceeds $250 million.

These reforms relax eligibility and investment requirements to allow managers to undertake a broader range of investment activities and greater diversity of investors.

Greenwich & Co is committed to supporting innovation in Australia and helping build skills, knowledge and expertise. By helping motivated start ups here in WA, we can raise the profile of investment in innovation and technology in Australia. Interested in more information about the impact of this new legislation as an innovative start up company or an investor? Contact us today and let us help you.