Raising Capital? How the new tax incentives can help your innovative company IF you are ‘investor ready’
Are you are a new and innovative company with your eye on raising capital? Then these new tax incentives may be just what the doctor ordered, however, as the tax offset portion of the incentive provides tax breaks for the investor rather than the start-up, being ‘investor ready’ is critical when looking to capitalise on this opportunity.
Designed to encourage new investment in Australian early stage innovation companies (ESIC’s), these concessions are in the form of:
- an upfront non-refundable tax offset of 20 per cent of the investment; as well as
- a CGT exemption on the subsequent disposal of the investment.
Whilst the concept of a tax offset such as this is relatively straight forward, what is not so straight forward is meeting the criteria to be considered a qualifying entity – an ESIC. This qualification forming an important aspect given the requirement for ESIC’s to report information about their investors to the Commissioner, in order for the ATO to assess whether these investors qualify for the tax offset and modified CGT treatment.
What is an Early Stage Innovation Company (ESIC)?
As is the case with most tax legislation, self-assessment is the name of the game. With the legislation setting out four specific objective threshold tests to determine if a company is at an early stage of its development.
Essentially being, an unlisted company, less than 3 years old, that has total expenses of less than $1 million and assessable income of less than $200,000.
Engaged in innovation
The criteria to evaluate whether a company is engaged in innovation are more complex, with the legislation containing a combination of tests. The first being a principles- based test to measure innovation considering that the business relating to that innovation:
- Has the potential for high growth
- Has scalability
- Can address a broader than local market
- Has competitive advantages.
As an alternative to satisfying the principle-based test, the legislation also introduces a ‘100 point innovation test’ whereby the company has to accumulate points according to a table of objective innovation criteria. These criteria broadly include:
- Research and Development (‘R&D’) claims, based on a certain percentage of the company’s prior year’s R&D expenditure
- Receipt of an ‘Accelerating Commercialisation Grant’
- Completed or undertaking eligible ‘accelerator programme’
- Previous third party investment of at least $50,000
- Holding certain enforceable intellectual property rights
- Collaborative agreement with research organisation or university to commercialise an innovation. Additional criterion may also be specified by regulation in the future.
It is important to note that companies who do not wish to self-assess whether they are involved in ‘innovation’, may be able to seek a ruling as to whether they can satisfy this test.
How can we help?
The strict eligibility requirements associated with this legislation have the potential to make compliance quite time consuming, coupled with the need to be in a position to be poised and ready to accept money from savvy investors looking to take up these tax incentives on offer.
BDO is in an excellent position to assist in the preparation of a ruling request for the ATO in respect to whether you satisfy the requirements for ‘innovation’, provide advice in relation to your potential status as a ‘ESIC’ and help you work towards becoming ‘investor ready’ and take receipt of funds to take your innovation to the next level.
A concise analysis of this legislation has been undertaken by BDO and can be found on our website.
Should you be interested in further information about the potential impacts of this new legislation as an investor or innovative start-up company please don’t hesitate to contact me.