Everything founders and investors need to know about the new startup tax incentives
Monday, September 5, 2016/
A number of months ago the government introduced tax incentives for early stage investors whereby from July 1, 2016, if you invest in a qualifying early-stage innovation company (ESIC), you may be eligible for tax incentives.
A few of the startups we work with have contacted us and asked: “I have an investor who wants to put in money but they want to make sure they are going to get the tax incentive, what do we need to do?”
There are three things that need to be considered:
- What do the investors need to know?
- Does your company meet the requirements as an ESIC?
- What to report to the ATO once you receive an investment
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 shares are issued. The shares must be issued on or after July 1, 2016.
The benefits for investors are:
- Non-refundable carry-forward tax offset equal to 20% of the amount paid for their qualifying investments. This is capped at a maximum tax offset amount of $200,000 for the investor and their affiliates combined in each income year. There is a cap of $50,000 for investors that that don’t meet the ‘sophisticated investor’ test.
- Modified capital gains tax treatment, under which capital gains on qualifying shares that are continuously held for at least 12 months and less than 10 years may be disregarded. Capital losses on shares held less than 10 years must be disregarded.
The investor must determine whether they are eligible for the early-stage investor tax incentives (for example whether they are an affiliate of the ESIC). In addition, the onus is on the investor to confirm that the company qualifies as an ESIC at the relevant test time. The investor should keep records to support their entitlement to the early stage investor tax incentives.
A company will qualify as an ESIC if it meets both:
- the early stage test; and
- either the 100-point innovation test or principles-based innovation test.
Practically, the simplest way to determine its eligibility is if a company undertakes activities that meet the 100-point innovation test, as opposed to the principles-based innovation test.
A company can instead choose to request a ruling from the Australian Tax Office on whether it qualifies as an ESIC.
Reporting for investors
In order to get the benefit, you claim the early stage investor tax offset in your income tax return. If you do not use all of your tax offset in that year, you can carry it forward for use in future income years.
Reporting for ESICS
Companies are required to report information to the ATO if they issue new shares to one or more investors during a financial year that could lead to an investor being entitled to access the early stage investor tax incentives.
The company must report the information to the ATO by July 31 each year for new shares issued in the previous year.
The form to report information is being developed.
In the meantime, for each investment that a company receives during the year that may give rise to an investor accessing the tax incentives, it should keep the following information in order to report:
- ABN, name and address for the investor (plus the date of birth for investors that are individuals);
- number of new shares issued to the investor;
- amount paid for the new shares;
- date the shares were issued; and
- percentage of shares in the company held by the investor immediately after the shares were issued.
The company also needs to make sure that it meets the requirements for being an ESIC. When reporting, you will be asked to specify whether the 100-point innovation test or principles-based innovation test has been applied, and whether you have received a ruling on your eligibility.
Companies will report this information electronically when the form becomes available.
When getting an investment, both the investee and the investor should keep records to show that the company meets the requirements of being an ESIC and the investor is eligible for the tax incentive.
They should also keep records of the investor’s particulars, as well as the details of the share issue. ESICs should ensure they report by July 31 and investors should remember to include the details in their tax return.
This article was first published by StartupSmart.