All about innovation

7 Year ESIC Update

2023-06-14 14:09:22

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It's been seven years since the Turnbull government enacted the ESIC regime with quite some change to the venture industry in Australia.

 

ESIC investors have contributed over $190 million in early-stage investment clearing $25m and growing year on year.  Over 1,615 companies have raised capital with the help of these measures.

 

We are aware of several companies that are now listed on the ASX thanks in part to the early stage backing, and strong interest in the markets, until recently.

 

Speaking to founders, ESIC was most helpful with

 

- closing a round, and

- building interest in the business, and

- increasing shareholder loyalty

 

What's hidden is the dual benefit that the ESIC assessment process has, focusing founders and investors on key growth metrics and milestones that help build a foundation for later rounds.


Many founders use the same core docs they used for ESIC through subsequent raises and negotiations.

 

Investors are clearly attracted to the tax incentives, though frequently use Self Managed Superannuation Funds that may well be in pension phase at the time of exit anyway.

 

So its unclear if its simply the tax advantage or a wider pool of benefits driving the decision making.

 

Many startups and investors point out that mirror legislation in the UK, US and Singapore is more attractive and note the current downturn presents an opportunity to expand the regime to include more deep and Bio tech businesses.

 

In any case, keep the yearend in mind and remember to lodge your ESIC statements before your June BAS.

 

Cheers,


Matthew

 

 

Published By: Matthew

Question Time: Am i eligible to claim for the ESIC offset if my investment was used to meet the 100

2023-06-14 14:18:31

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Some learnings based on a question put to the ATO forum; which reads  

I invested in a company on 27/6 that qualified for ESIC in the 18/19 financial year. They lodge the application for ESIC for both the 18/19 and the 19/20 financial year on 31/7/20. To meet the ESIC requirements, they did the 100 point test and obtained 50 points from my investment (as a third party investor) would i still quality to claim for the ESIC tax incentive?

From the ATO website on ESIC, i know i can carry the tax offset forward. As i have already lodge the 2018/19 tax return, can i just start the tax offset for the 2019/20 tax year?

Also am i able break up the investment amount to a max 50k over a few years so i do not hv to meet the sophisticated investor requirement?

 

Our reply:

An investor will not qualify for the first independent 50k investment made because of the investment made*, however this does not rule out qualification, it just means we need to look to the principals based assessment for the company. It is not uncommon for companies to gain points qualification after a seed or pre-seed raise. More info about the principals method is here.

Generally speaking, if the company qualified at the time of the investment* (without the points attributed to your investment), and you also qualified at that time, you will able to claim the carry forward offset in a latter year (assuming you have tax to pay).

Keep in mind that if you invest 1 cent over 50k per annum (across all your investments) you will not be eligible for ESIC incentives unless you are an exempt 708 investor at the time. It is permissible for retail investors to make a series of investments in ESIC's or the same ESIC, provided the 50k cap is not exceeded in any given tax year. 

You should contact the company and find out if they lodged ESIC notification each year with the ATO or if they acquired a Private Binding Ruling (PBR). Ultimately it is your responsibility to maintain proof your ESIC claim so I recommend you read up in detail and try to find a guide for record keeping.

Notes:

* this is a clear anti avoidance mechanism, outlined in the EM 
* Investment on 27/6 could be a timing issue, if this was the last year, I'd recommend you consider the date of the investment (per the company register) and not the date you paid.

* Assumes ordinary shares (not convertible notes etc)

 

 

Published By: Matthew at ESIC Directory

What about IPO? or PL to Limited Conversion?

2019-04-10 18:27:03

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We were recently asked 'What happens when my ESIC is listed on the ASX?' or ‘What happens when my ESIC converts from a Private into a Public Company?’

These seem like good problems to have, though it’s natural for early stage investors to become anxious, after all, they are the ones who have to prove any claim.

ESIC policy contemplated capital gain, so it should not come as a surprise to find that the tax rules do not differentiate these changes as the company progresses from strength to strength. ESIC status is established at the point of investment, not at exit.

Simply put, with all other things being aligned, the established prior ESIC status remains, and assuming the concession applies, and timing rules are met, then the taxpayer can disregard the capital gain.

*The 12 month holding rule, 10 year limitation and eligibility of the investor.

Savvy investors would be wise to review proofing documentation and or consider a private binding ruling, if they have not done so already.

 

 

 

 

Published By: Matthew at ESIC Directory

Early Stage Test - Are you a listed company?

2019-04-10 18:13:33

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We often find that founders overlook the early stage tests in a rush to confirm they have sufficient points to qualify as an ESIC, though even professionals can jump to conclusions based on intuition or cognitive bias.

One good example of this is the hurdle regarding prior listing. Conservative advisers may assume that listing includes listing by proxy, i.e. ownership via a listed entity along similar lines to the rules that apply in the Corporations Act, though careful review of ATO guidance indicates otherwise.

ATO rulings have taken a more direct interpretation of listing, applying it directly to the company itself, i.e. the threshold is simply 'has this company listed'.

You may argue that this is not within the spirit or policy intent, though others would counter that the overarching goal of incentivised innovation is encouraged.

We'll be watching closely to see how the upcoming Tax Determination handles this issue and recommend that companies with listed company backing take the precautionary step of obtaining a ruling.

 

 

Published By: Matthew at ESIC Directory

Genuine IP

2019-02-19 17:58:12

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You may not think that your company structure has much to do with the act of developing an innovation for commercialisation, though think again. 

The ATO recently confirm that subsidiary company would not satisfy the commercialisation limb of the first principal test, 'developing a new and or significantly innovation' as the company itself did not pass the hurdle. 

It seems unlikely, however it’s not uncommon for R&D to be claimed in a holding or IP company, with the trading and fundraise in another. 

Quote:

  Since the Company does not own the IP it is not genuinely focussed on developing the supplements for commercialisation. Although it operates in conjunction with SubCo and provides funding, this is insufficient to be considered to be genuinely focussed on developing the innovation

The view was expressed in a private binding ruling, so technically it does not apply to all taxpayers, though we can confirm that this is not the first time the issue has arisen and on prior advise the opinion was the same.

 

Published By: Editor