As you’re probably aware, certain investments into a qualifying Early Stage Innovation Company (ESIC) from 1 July 2016 may entitle a taxpayer to tax incentives including a non-refundable tax offset equal to 20% of the investment (up to a $200,000 limit each income year for “sophisticated investors”) as well as capital gain tax exemption on shares held between 1 and 10 years.
Below is the latest update on the action items required for investors and ESICs.
There is a large volume of information on the tax incentives, including the detailed ATO materials and Azure Group's own brief.
Ultimately the onus is on the investor to confirm (1) the company qualifies as an ESIC at the relevant test time, and (2) the investor-specific requirements are satisfied. However a company has reporting obligations and of course may make representations to the investor regarding their eligibility as an ESIC.
Given the complex tax-based rules, and the potentially significant impact on an investor’s tax affairs, we urge you to exercise caution when dealing with this matter.
Action items include (but are not limited to):
1. Company to assess whether it meets the ESIC definition and obtain tax agent opinion if required.
2. If a company does not meet the 100 point test, it will need to rely on the principles-based innovation test. An ATO ruling is recommended due to the subjective nature of that test.
3. Company to obtain investor information and report electronically to the ATO before 31 July 2017. The form is still being developed by the ATO and will likely be available around July 2017. The following information should be obtained throughout the year (instead of waiting till July):
- ABN, name and address for the investor (plus the date of birth for investors that are individuals)
- number of new shares issued to the investor
- amount paid for the new shares
- date the shares were issued
- percentage of shares in the company held by the investor immediately after the shares were issued.
When a company submits the ATO form, it is declaring that it meets the requirements to be an ESIC for all of the reported investments. Company will be asked to specify whether the 100-point innovation test or principles-based innovation test has been applied, and whether it has received a ruling on its eligibility. The ATO notes that submitting the form when you are aware that the company does not meet these requirements could result in penalties, including possible criminal penalties, under the tax law.
4. Where the investment is made through a partnership or trust (e.g. fund), the partnership or trustee must calculate and notify the member in writing of their share of the tax offset within 3 months of the end of the income year.
5. Investor to assess company’s ESIC status and their own eligibility to claim the tax incentive in their tax return (e.g. “affiliates” of an ESIC, and investors holding more than 30% interest are ineligible).
6. Investor to obtain accountant’s certificate confirming they are a “sophisticated investor” (otherwise investments into ESICs must not exceed $50,000 to preserve the tax incentives).
Over the course of the next few months we will reach out to companies we have assisted in this regard. In the meantime should you have any questions on the above please contact us at any stage and we would be happy to assist.