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  • Qualifying as an early stage innovation company

    For an investor to be entitled to the tax incentives, the company must qualify as an early stage innovation company (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.

    A company will qualify as an ESIC if it is not a foreign company under the Corporations Act 2001 and meets both:

    In practice, if a company undertakes activities that meet the 100-point innovation test, this is likely to be the simplest way to determine its eligibility, when compared to the principles-based innovation test. The 100-point test is an objective test and should be self-assessed.

    A company can instead choose to request a ruling from the ATO on whether it qualifies as an ESIC applying the principles-based innovation test. Refer to companies and investors for more information on requesting a ruling.

    The investor must determine whether they are eligible for the early stage investor tax incentives, which means that the onus is on the investor to confirm that the company qualifies as an ESIC at the relevant test time. If a company is later found not to be an ESIC at the relevant test time and the investor has already claimed for tax incentives, the investor will need to amend their claims. The investor should keep records to support their entitlement to the early stage investor tax incentives.

    Example: Early stage investor tax offset

    On 1 June 2017, Thomas (a sophisticated investor) pays $100,000 for new shares issued in Sweeney Co, an ESIC. If Thomas meets all of the eligibility requirements, he is entitled to an early stage investor tax offset of $20,000.

    In determining whether Thomas is entitled to early stage investor tax incentives for the shares, Sweeney Co's status as an ESIC is tested at the point in time immediately after Thomas was issued with the new shares on 1 June 2017.

    If there is a change that means Sweeney Co no longer qualifies as an ESIC after this point in time, this won't affect Thomas' entitlement to the tax offset or the modified CGT treatment for the shares.

    End of example

    Early stage test requirements

    To meet the early stage test, the company must meet four requirements.

    These requirements are tested at the point in time immediately after the company issues the shares to the investor. If a company doesn't meet all of the requirements at that time, the investor won't qualify for the tax incentives in relation to those shares.

    The four requirements are:

    The company must have been incorporated or registered in the Australian Business Register

    The company must have been within the last three income years (the latest being the current income year in which the requirement is tested):

    • incorporated in Australia, or
    • registered in the Australian Business Register (ABR).

    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 at the test time)
    • the company and its wholly-owned subsidiaries had expenses of $1 million or less across the last three income years before the current income year.

    See also:

    The company (plus any wholly-owned subsidiaries of the company) must have total expenses of $1 million or less in the previous income year

    Draft Taxation Determination TD 2019/D5 Income tax: tax incentives for early stage investors: what is an 'expense' that is 'incurred' for the early stage test? explains 'expenses' and 'incurred' in more detail.

    The company (plus any wholly-owned subsidiaries of the company) must have assessable income of $200,000 or less in the previous income year

    Companies that had no assessable income in the previous income year will meet this requirement. In determining the company’s assessable income, any amount of Accelerating Commercialisation GrantExternal Link that the company received in that year is disregarded.

    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.

    100-point innovation test requirements

    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 relevant shares are issued to the investor (the test time).

    If a company doesn't meet either the 100-point innovation test or principles-based innovation test at the test time, the investor will not qualify for any early stage investor tax incentives in relation to those shares.

    Table: 100-point innovation test

    Points

    Criteria

    75 points

    At least 50% of the company's total expenses for the previous income year are eligible notional deductions for the research and development tax incentive.

    75 points

    The company has received an Accelerating Commercialisation GrantExternal Link at any time. The amount of this grant is also excluded from the company's assessable income for the purposes of the early stage test.

    50 points

    At least 15% but less than 50% of the company's total expenses for the previous income year are eligible notional deductions for the research and development tax incentive.

    50 points

    The company has completed or is undertaking an eligible accelerator program that provides time-limited support for entrepreneurs with a start-up business. This support may involve providing mentorship, training, education and access to networks.

    The program must be provided to entrepreneurs that are selected in an open, independent and competitive manner. It is likely that an entity that has been selected through this process would also meet the principles-based innovation test.

    The entity providing the program has to have been providing eligible programs for at least six months, and the programs must have been completed by at least one cohort of entrepreneurs.

    50 points

    One or more third parties have previously paid a total of at least $50,000 for the issue of new shares in the company.

    These points are only available if:

    • the third party was not an associate of the company immediately before it was issued with the shares
    • the company issued the third party with the shares at least one day before the test time
    • the third party did not purchase those shares primarily to assist another entity to become entitled to early stage investor tax incentives.

    Examples of entities that would be an associate of a company include:

    • a partner of the company or a partnership in which the company is a partner
    • a trustee of a trust estate under which the company or associate benefits
    • another entity (including a person) that, acting alone or with another entity or entities, sufficiently influences the company
    • an entity (including a person) that, either alone or together with associates, holds a majority voting interest in the company
    • a second company that is sufficiently influenced by the company or the company's associates
    • a second company in which a majority voting interest is held by the company or the company's associates.

     

    50 points

    A company has enforceable rights on an innovation through:

    A company that holds a licence to intellectual property owned by another party is able to obtain these points.

    25 points

    A company has enforceable rights on an innovation through:

    A company that holds a licence to intellectual property owned by another party is able to obtain these points.

    These points are only available if the company did not receive 50 points for holding a standard patent, plant breeder's right or equivalent right overseas under the previous criterion.

    25 points

    The company has a written agreement to co-develop and commercialise an innovation with:

     

    The legislation contains a regulation-making power which provides flexibility for further points to be added for meeting additional innovation criteria.

    Last modified: 20 Aug 2020QC 48899