The early stage investor tax offset is generally equal to 20% of the total amount paid (including non-cash benefits) in return for the qualifying shares. Investors and their affiliates are entitled to a maximum offset of $200,000 in an income year. This includes any offsets that are carried forward from prior years' investments and offsets claimed on indirect investments.
An individual or company is an affiliate of an investor if, in relation to their business affairs, the individual or company acts or could reasonably be expected to act in accordance with the investor's directions or wishes or in concert with them.
The effect of the $200,000 annual cap is that, for eligible investments of up to $1 million, a 20% non-refundable carry-forward tax offset is available. Eligible investments by investors and their affiliates that exceed $1 million in an income year won't increase the amount of tax offset available to them, although the modified CGT treatment will apply to all of the shares.
If you don't meet the sophisticated investor test, the maximum early stage investor tax offset you can claim is $10,000, because your total annual investment in all qualifying ESICs cannot exceed $50,000.
Tax offsets directly reduce the amount of tax you have to pay, with each dollar of tax offset reducing your tax payable by the same amount. As the early stage investor tax offset is a non-refundable tax offset, it can reduce your amount of tax payable to zero, but it cannot result in a tax refund on its own.
If you don't use all of your early stage investor tax offset in one year, you can carry forward the remaining amount for use in future income years. However, the total amount of early stage investor tax offset that you and your affiliates combined can use or carry forward in an income year cannot exceed $200,000.
Example: Calculating the early stage investor tax offset
Savannah, a sophisticated investor, pays $4 million for new shares in ESICs during the 2016–17 income year.
Although 20% of the total amount Savannah has paid for the ESIC shares is $800,000, her entitlement to the early stage investor tax offset is capped at $200,000 (provided the other eligibility requirements for the incentives are met).
Savannah has an income tax liability of $50,000 for the 2016–17 income year. She uses $50,000 of the early stage investor tax offset to reduce her tax payable to zero. Savannah can carry forward the remaining $150,000 in early stage investor tax offset to future income years.
The modified CGT treatment applies to all of the shares that she purchased.
Example: Applying the $200,000 cap – affiliates
Georgia Co purchases $2 million of qualifying shares in an ESIC in the 2016–17 income year. Georgia Co and Savannah are affiliates in the 2016–17 income year.
As the $200,000 maximum cap applies to Savannah and her affiliate Georgia Co, the combined tax offset claimed by Savannah and Georgia Co in the 2016–17 income year cannot exceed $200,000.
Example: Applying the $200,000 cap – carried forward amount
Jason, a sophisticated investor, carried forward a $50,000 early stage investor tax offset from the 2016–17 income year. During the 2017–18 income year he pays $950,000 to acquire qualifying shares in ESICs. Jason's entitlement for the early stage investor tax offset for the 2017–18 income year is $190,000.
As the $200,000 maximum cap applies to his 2017–18 income year and carried forward amounts, he can only claim the $50,000 carried forward amount plus $150,000 of the 2017–18 income year amount. The balance of the 2017–18 income year amount ($40,000) can neither be claimed nor carried forward to future years.
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