From 1 July 2016 investors have been able to benefit from the Early-Stage Innovation Company (ESIC) incentives for qualifying investments. The tax incentives available are:
- A non-refundable carry forward tax offset of up to $200,000 in any one income year
- Capital Gains Tax (CGT) exemption or reduction on eligible investments.
Qualifying for the tax incentives
Broadly, the requirements for investors to qualify for the incentives include that they must:
- Purchase newly issued equity interest shares in a Company that meets the requirements of an ESIC immediately after the shares are issued.
- Not be an early-stage venture capital limited partnership, a widely held Company or a subsidiary of a widely held Company.
- Not be an affiliate of the Company in which the investment is made.
- Not hold more than a 30% interest or control of the Company in which the investment is made.
- Meet the sophisticated investor test if total investment in qualifying ESICs in a financial year exceeds $50,000.
Non-Refundable Carry Forward Tax Offset
Qualifying investments will entitle the investor to a non-refundable, carry forward, tax offset equal to 20% of the total amount paid for the shares, up to a maximum offset of $200,000 in a financial year. Any unused tax offset can be carried forward to future years until it is all utilised.
However, if the investor does not qualify as a sophisticated investor under the Corporations Act guidelines, then the maximum offset available is $10,000 as unsophisticated investors are limited to a maximum investment of $50,000. Importantly, if an unsophisticated investor invests more than the $50,000 limit then they become ineligible to receive any tax offset at all.
Modified CGT Treatment for Eligible Investments
If the qualifying shares are held for less than twelve months, then no CGT concessions are available for investment gains, but any capital losses must be disregarded.
If the qualifying shares are held for more than twelve months but less than ten years, any capital losses must still be disregarded however during this period any capital gains can also be disregarded. Therefore, any profit on disposal during the one-to-ten-year ownership period is completely tax-free.
If the qualifying shares are held for more than ten years, then the cost base of the investment for CGT purposes becomes the market value of the shares at the tenth anniversary of the share issued date. Therefore, any unrealised gains up to the 10-year anniversary of the share issue become tax-free gains. From the ten-year point onward, they are treated the same as any other capital investment.
Please note, however, that for unsophisticated investors to qualify for modified CGT treatment they must invest no more than $50,000 in any one income year. If the investment exceeds this cap, then no CGT concessions will be available, and any capital gains will be treated the same as other capital investment gains.
For sophisticated investors, there is no limit on the investment amount eligible for the CGT concessions.
To find out more about how we can assist you with understanding the ESIC offsets and concessions, please don’t hesitate to send us an email or call 07 3221 5677.
By: Tanya Bridge CA, Private Client Manager