The Australian government has finalised the legislation for the Early Stage Innovation Companies (ESICs) prior to the Parliament being adjourned for the Federal election. Unfortunately, the legislation for Crowd Funding Equity Raising entities was still being debated in the Senate when the Senate adjourned. Hopefully, this legislation will be finalised after the election when the Senate reconvenes.
The ESIC legislation has benefits for small/medium enterprises, sole traders, entrepreneurs and inventors who have some new innovation products, processes, services, organisational or marketing methods that wish to raise capital. There are also significant benefits for investors via a tax rebate, based on an investor’s investment and potential CGT exemption on that investment in an ESIC.
To be an eligible ESIC, the company must have been incorporated in the last 3 years, although there are some ways that a company incorporated 6 years ago could be eligible. The company must have incurred total expenses of less than $1M in the income year before the current income year. The company must have earned total assessable income of less than $200,000, excluding any grant income from an Accelerating Commercialisation grant in the income year before the current income year. The company must not be listed on a stock exchange anywhere in the world.
After the company has passed this preliminary test, the company then has to satisfy one of two further tests:
The Gateway Test
The company must earn over 100 points from a series of questions relating to:
The Principles Based Test
This test is only needed if the company was unable to pass the Gateway Test.
The Gateway Test and the Principles Based Test are self-assessment tests. Companies would be wise to obtain independent verification of eligibility as an ESIC to satisfy investor due diligence requirements. Most investors will require some independent verification that the company is going to be accepted by the ATO as being an ESIC because of the importance for most investors for the tax offset and the CGT avoidance.
The company must be able to positively answer 5 questions relating to the potential to commercialise a new product, process, service, marketing or organisational method.
Companies will need to develop an outstanding investment ready presentation for investors, which would include details of:
Investors can obtain a tax offset calculated at 20% on their investment, up to a maximum of $200,000 per annum for sophisticated investors and $10,000 per annum for retail investors. The maximum investment for a retail investor is $50,000 per annum.
An investor can also obtain a CGT exemption if shares are held for more than one year and less than 10 years.
A sophisticated investor is outlined in the Corporations Code basically states that to an investor who has earned more than $250,000 in assessable income in the last two year or has assets a value of a net amount in excess of $2.5M. A sophisticated investor who is able to produce a letter confirming those items from a practicing accountant will be deemed as such.
ESS Small Business and ESS BIZTOOLS have developed a range of products to assist accountants and business advisers to be able to advise small/medium enterprises on their eligibility for the ESIC status.
If you would like to have a discussion with an accountant who is utilising our special ESIC Product Package, ESS Small Business has a directory of accountants/advisers who are interested in supplying a wider range of services, commonly known as “business advisory services”, to small/medium enterprises. This directory is called “Find an Accountant/Adviser”.
Visit www.esssmallbusiness.com.au and click on “Find an Accountant/Adviser” menu tab. All you need to do is to type in your postcode and the system will then show you accountants/advisers in or near your postcode who offer a wider range of commercial services to small/medium enterprises.
We’re presenting a special webinar, featuring “Early Stage Innovation Companies”, on Wednesday 6th July 2016 at 4pm AEST. If you would like to register, free of charge, please click here.
A copy of a complimentary article, “Early Stage Innovation Companies”, can be downloaded below.
If you have any questions in relation to ESIC, or how accountants/advisers can assist you to add value to your business, please don’t hesitate to contact me on 1800 232 088 or send me an email at firstname.lastname@example.org.
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Episode 048 - The Finalisation of the ESIC Legislation will be a Great Boost to Many Businesses
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