What is an ESIC?

For an investor to claim the tax incentives for investing in innovation, the company they’re investing in must qualify as an Early Stage Innovation Company (ESIC).

To qualify, a company must meet

  • the early stage test and
  • either the 100-point innovation test or the principles-based innovation test.

ESICs raising more than $2.5 million or with more than 20 investors in a 12-month period, also need to maintain a registry of investors’ certificates. (This is a standard Corporations Act disclosure requirement which is regulated by ASIC.)

By asking investors to share their certificate via Cygura, the ESIC’s investor registry is created and maintained automatically.

Early stage innovation company test

To meet the early stage test, the company must meet four requirements at the time the company issues the shares to the investor.

These four requirements are:

  • The company must have been incorporated or registered in the Australian Business Register
  • The company (plus any wholly-owned subsidiaries of the company) must have total expenses of $1 million or less in the previous income year
  • The company (plus any wholly-owned subsidiaries of the company) must have assessable income of $200,000 or less in the previous income year
  • 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 from the table below at the time the shares are issued to the investor (the test time).

100-point innovation test table

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 programme 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 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 either:

  • a standard patentExternal Link granted in Australia in the last five years
  • a plant breeder's rightExternal Link that has been granted in Australia in the last five years
  • an equivalent intellectual property right granted in another country.
  • A company that holds a license to intellectual property owned by another party is able to obtain these points.

25 points

A company has enforceable rights on an innovation through either:

A company that holds a license 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 either:

                                                                                

                        

                                   

Principles-based innovation test requirements

To qualify under the principles-based innovation test, the company must meet five requirements.

There are five requirements of the principles-based innovation test:

Companies can also request a ruling from the ATO on whether it qualifies as an ESIC.

Source: Australian Tax Office as at 1 September 2016

This is general information only and does not constitute advice. Please refer to the ATO website for further information.

Stay on top of the latest market news and investment deals.