ESIC - The Art of Making Your Startup an Attractive Investment
Today's investors truly are spoilt for choice when it comes to spending their savings.
Investments littered across different asset classes with different risk profiles and yields abound. Bonds and property traditionally are seen to be the least 'risky' whereas more modern investments such as ETFs or cryptocurrencies carry a higher level of perceived risk.
Investments in new startups are often discussed as one of the most risky of all - particularly for newer investors without the 'insider' level of background information.
The Australian government has in recent years tried to reverse this perspective - particularly as it is these same innovative startups that will lead to the industries and jobs of the future.
As part of the 'ideas boom' movement in 2015, the government cast a spotlight for savvy investors onto the burgeoning startup scene through the Early Stage Innovation Company (ESIC) tax incentive scheme.
The main drawcard for investors involves a 'tax break' of 20% equal to the investment made towards a qualifying ESIC share in a startup. This generous concession assists the investor and affiliates to invest up to $1 million whilst making full use of the incentive.
The benefits don't stop there - startups with ESIC status are also privy to relaxed CGT rules. Investors holding the shares between 12 months and 10 years don't incur capital gains (or losses) during this time.
If we were to see the ESIC in action it might occur like thus….
An investor becomes a passionate fan of a local startup, NetBux, after seeing the founder's pitch during a conference. In the discussions around investment in NetBux, the two parties agree to a $50,000 investment in respect of 5% of the startup company as part of an angel investment.
When it comes to the investor doing their annual tax return for the 2018 financial year, the investor finds that his taxable income of $180,000 should roughly equate to a tax bill of $57,832. After a thorough review of his investments for the year, James is later advised by Fullstack that his $50,000 investment was eligible for the ESIC concessions, allowing for an additional 20% in tax offsets be included in his tax return. The tax savings here amount to $10,000 - definitely welcome news.
After 7 years of outstanding year on year growth, NetBux has become an established player in the fintech scene. The upcoming IPO will help cement its position in Australia and help them launch into the US market where a local competitor has already made some headway. James decides to part with his stake as part of the IPO, and makes $820,000 from his initial investment of $50,000.
The net capital gain of $770,000 is completely tax-free owing to the ESIC status - whereas under normal circumstances for traditional investments like property or BHP, the capital gain could have amounted to another $180,950 in tax - a definite boon for the startup movement.
Startups wanting to obtain the popular ESIC investment status will find that the criteria is based on a rather significant 100 points test. Highly favoured criteria include having the eligible expenditure for the R&D Tax Incentive, obtaining the Accelerating Commercialisation grant, the receipt of 3rd party investments or participating in an accelerator program.
Fullstack helps startups make a determination on their eligibility for the ESIC status and incorporates the tax break for investors in their tax situation.
For a complimentary discussion about the ESIC tax concessions and how they could apply to you, reach out at info@fullstack.com.au.