Tax Concession for Start-Ups

From July 2016, investors in qualifying early-stage investment companies (ESICs) may be eligible for tax incentives. The highlights for investors are:

• A 20% non-refundable tax offset on equity investments into start-up companies capped at $200,000 per investor (and their affiliates) per year;
• A 10 year capital gains tax exemption for investors, provided investments are held for at least 12 months.

The incentives will be available for investments in companies that:

• Were incorporated during the last 3 income years.
• Are not listed on a stock exchange.
• Have expenditure and income less than $1 million and $200,000 respectively in the previous income year.
• The investor (and their connected entities) must hold less than 30% equity interest in the ESIC immediately after the equities are issued.

Additionally, the following conditions must be met:

• The shares must be newly issued on or after 1 July 2016;
• If investment is more than $50,000, the investor must meet the sophisticated investor test;
• The Investor and the ESIC must not be affiliates of each other.

Qualifying start-ups will need to demonstrate that they are focussed on developing new or significantly improved innovation for the purpose of commercialisation and show that the business has the potential for growth, has scalability, can address a broader local market and has competitive advantages. There are additional conditions and limitations on the concessions which can be discussed further with a Brentnalls SA team member.

If you are looking at starting a new business, you should consider these measures together with other factors in deciding how to structure your business. The following additional considerations may be relevant:

• Access to government grants (including Research & Development Tax Incentives, Accelerating Commercialization Grants, etc);
• Ability to access debt and equity funding;
• Protection of intellectual property;
• Potential for foreign investment;
• Succession planning and exit strategies; and
• Tax implications.

Next Steps

If you have a new business developing an innovative product, you may be able to utilise these concessions to encourage venture capitalist/angel investors to provide essential financing for your business. Alternatively, if you have funds available for investment in innovative businesses, there may be significant tax concessions available to you.