To qualify for the tax incentives, investors must have purchased new shares in a company that meets the requirements of an ESIC immediately after the company issues the shares. The shares must be issued on or after 1 July 2016. If the shares are issued as a result of converting convertible notes, it is the date of the conversion that is relevant.
If the company has satisfied the requirements to qualify as an ESIC and later ceases to be an ESIC, this won't affect the investor's entitlement to the early stage investor tax incentives for the shares.
The early stage investor tax incentives aren't available to you if:
- you didn't purchase the shares in the ESIC directly from the company as newly issued shares
- the shares are not equity interests in the ESIC
- you are an early stage venture capital limited partnership
- you are a widely-held company or a wholly-owned subsidiary of a widely-held company (a widely-held company is either a company that is listed on an approved stock exchange or a company with more than 50 shareholders – unless certain requirements are met)
- your total investment in one or more ESICs for the income year is more than $50,000 and you didn't meet the sophisticated investor test in relation to at least one of those share offerings
- you or the ESIC are affiliates of each other at the time the shares are issued – an individual or company is an affiliate of another entity where, in relation to their business affairs, the individual or company acts or could reasonably be expected to act in accordance with that entity's directions or wishes or in concert with the entity
- you hold equity interests in the ESIC (including any entities connected with the ESIC) immediately after you are issued with the new shares that carry the right to either:
- receive more than 30% of any distribution of income or capital by the company or the entities connected with the ESIC, or
- exercise, or control the exercise of, more than 30% of the total voting power in the company or the entities connected with the ESIC
an entity is connected with the ESIC if the entity controls, or is controlled by, the ESIC, or both entities are controlled by the same third entity.
- you acquired the shares under an employee share scheme or by exercising a right you acquired under an employee share scheme.
The early stage investor tax incentives are available to both Australian resident and non-resident investors.
If the investor is a trust or partnership, special rules apply so that the entitlement to the tax offset and the modified CGT treatment flow through to the member of the trust (a beneficiary, unit holder or object) or partnership (a partner), or to the ultimate member if there is a chain of trusts or partnerships. The tax offset will not flow through to the member if the member is a widely-held company or a wholly-owned subsidiary of a widely held company.
If the investor is a superannuation fund, the trustee of the fund – not the fund members – would be entitled to the tax offset and the modified CGT treatment.