Few people are aware of a tax scheme that makes startup investments an attractive opportunity.
Does a 20 per cent tax offset of up to $200,000 every year on investment in an eligible Australian startup sound like a good deal?
And how about a 10-year capital gains exemption on those investments, with no ceiling?
Then factor in that, if you own no more than 30 per cent of the company, hold the shares for at least a year and sell them within 10 years, the capital gain is tax-free.
No, this is not a trick.
Welcome to the Early Stage Innovation Company (ESIC) scheme, which has been law since July 2016.
In my mind, it’s probably the best thing Malcolm Turnbull did as prime minister.
However, there’s a glitch.
“Many investors do not know about ESIC and the value it delivers to investors in early-stage innovation companies,” Perth Angels chair Ian Brown told Business News.
“ESIC is something that you can self-assess … which I think is all that is needed in 90 per cent of cases as the rules are detailed very clearly on the ATO website and it’s quite simple to apply them to any investment being considered.”
Several members of Perth Angels reported to Business News they had successfully claimed ESIC on several startup investments.
Increasingly, startups are declaring their ESIC status in their pitch decks.
So it can be done.
Apart from Perth Angels, I have met very few potential investors, family offices or others who know anything about ESIC.
If you search the Business News archive you’ll find an article I wrote in 2015, when the scheme was announced, and then two sponsored articles promoting it since.
The ESIC scheme here in Australia is based on the highly successful Enterprise Investment Scheme (EIS) in the UK, which was launched in 1994.
In its years of operation, the UK scheme has been the conduit through which a combined £20 billion has been invested.
In the UK, most angel investors will only invest in EIS-eligible startups.
These tax incentives demonstrate how the tech sector is now a global game.
Attracting and retaining talent and supporting the most promising scalable businesses are what it’s all about.
However, these incentives are ineffective if few people take advantage of them.
How to find an ESIC
Please note, I’m not providing any financial advice here.
You will need to do your own independent research into ESICs, the tax laws and which startups to invest in.
Talk to your accountant or financial adviser.
In the broadest terms, to be eligible, the ESIC must be an Australian, unlisted company, with expenses less than $1 million a year and assessable income less than $200,000/year.
There’s a 100-points test on the ATO website to determine whether a particular company qualifies.
Alternatively, the ‘principles test’ defines an ESIC as: “High growth potential, be able to scale, address a broader than local market, and have competitive advantages.”
While you can ask the ATO for a ruling, this can be a long and expensive process.
In Australia, the onus is on the investor to prove the company is an ESIC at the time of the investment.
If the company ceases to be an ESIC the day after you invested, no matter.
“All things being equal, those companies which are ‘ESIC eligible’ are generally more attractive to an investor … as opposed to investing into a company that is not ESIC eligible,” RSM principal R&D Tax Steve Elias told Business News.
Angel investment
Recent reports from local investment data company Techboard have shown relatively low investment into early-stage private companies in Western Australia, compared to other states.
WA invested $85 per capita into startups last financial year (a fall of 41 per cent from the previous year), compared to $492 in NSW and $356 in Victoria.
In Israel, it’s $604 per person.
“Over time, these [tax] changes could make a real difference to the local tech startup sector. The effect of hundreds, perhaps thousands, of accountants telling their clients about the tax benefits of startup investing may herald a significant change in behaviour,” my 2015 article in Business News said.
Maybe the word needs to get out more.
