Test whether you are an Early Stage Innovation Company (ESIC) and what it could mean for investors.
As detailed in an earlier blog post here, there are lucrative new tax incentives and deductions for those who invest in Early Stage Innovation Companies, more commonly referred to as ESIC’s.
These incentives are of extraordinary significance to potential and current early stage investors when evaluating the attractiveness of a company.
For an investor to be entitled to the tax incentives, the company must qualify as an ESIC immediately after the new shares are issued to the investor. If the company no longer meets the ESIC requirements after this test time, this won’t affect the investor’s entitlement to the early stage investor tax incentives.
There is a simple two step process for determining whether or not your company can be classified as an ESIC. You must pass;
- The early stage test
- Either the
- 100-point innovation test or
- Principles-based innovation test
Part 1. The early stage test
In this part, there are 4 requirements which must be met, so get your pen and paper ready:
Requirement A — The company must have been incorporated or registered in the Australian Business Register.
Under this requirement, the company must have been either:
- Incorporated in Australia or
- Registered in the Australian Business Register (ABR)
Within the last three income years (the latest being the current income year).
If neither of these apply, both of the following requirements must be met:
- The company was incorporated in Australia within the last six income years (the latest being the current income year) and
- The company and its wholly-owned subsidiaries had expenses of $1 million or less across the last three of those income years.
Requirement B — The company must have total expenses of $1 million or less in the previous income year.
Requirement C — The company must have assessable income of $200,000 or less in the previous income year.
Requirement D — The company’s equity interests are not listed for quotation in the official list of any stock exchange, either in Australia or a foreign country.
If you meet all of the above requirements (A-D), congratulations, you’re still in the hunt.
Part 2A. 100-point innovation test
The easiest way to complete Part 2 is through the 100-point innovation test. This is completely objective, black & white and can be assessed by yourself in minutes.
To qualify under the 100-point innovation test, the company must obtain at least 100 points by meeting certain objective innovation criteria. This is tested immediately after the new shares are issues to the investor, otherwise known as ‘test time’.
The 100-point innovation test table lays out the criteria and corresponding points allocated.
Simply put, the collective points which apply to your company must add up to at least 100.
Part 2B. Principles-based innovation test
Another way to qualify as an ESIC is to meet the principles-based innovation test. This involves five requirements. It’s worth noting that this method is considerably more complex and ambiguous than the previous 100-point innovation test. Attempting this before Part 2A would be like forgetting your house keys and smashing a window before checking if the door is locked.
In short, the 5 requirements are:
Requirement A — The company must be genuinely focused on developing one or more new or significantly improved innovations for commercialisation.
Requirement B — The business relating to that innovation must have a high growth potential.
Requirement C — The company must demonstrate that it has the potential to be able to successfully scale up that business.
Requirement D — The company must demonstrate that it has the potential to be able to address a broader than local market, including global markets, through that business.
Requirement E — The company must demonstrate that it has the potential to be able to have a competitive advantage for that business.
Pretty messy, we know.
You can request a ruling for your company on the requirements for this test by submitting the relevant information to the ATO. More information on the tests can be found here.
In Summary
If your company can successfully meet the requirements for Part 1 and the requirements for either Part 2A or 2B, you are an ESIC and may advertise so to potential investors (while referring them to the relevant legislation to double check of course).
In an age of unprecedented technology advances, there are more innovative companies operating than ever before. If your company is aiming to change the way the world works, you better believe investors will want to hear about it.
If you are an investor who wants to know more about how you can benefit from investing in an ESIC, see here.
More information?
It goes without saying that some of the criteria and requirements have been summarised for your convenience. Please read the ATO’s full guide for qualifying as an ESIC before you go and shout it from the rooftops.
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This article contains general information only, and should not be considered as financial advice. We recommend you get professional advice before making an investment decision.
