Investor leverage – Early Stage Innovation Company

Investors in an Early Stage Innovation Company (ESIC) are eligible for tax incentives. This can incentivise people to invest in your business. But how do you work out if your business is ESIC-eligible?

There is an early-stage test which has maximum income and expenditure thresholds. If you fall within the ‘sweet spot’ there is then two avenues for becoming an ESIC; a 100-point innovation test (easy) or a principles-based test (harder).

A initial sign that you could qualify is that you are participating in the R&D Tax Incentive programme. This is easy if you are a client of ours as we are already privy to your R&D expenditure and company financials.

As an overall guide to be deemed ESIC you need the following:

• Be an Aussie registered business in the last 3 years. But you will be ok too if it is in the last 6 years, and you’ve had less than $1M of expenses over 3 years.
• Have <$1M expenses (including subsidiaries) in the previous income year
• Have <$200K turnover (including subsidiaries) in the previous income year
• You are not listed on the stock exchange

You can use the ATO’s simple tool for further clarity. After this there are two pathways, one ‘easy’ the other ‘harder’, to confirm whether your business is deemed an ESIC:

Pathway 1: 100-point innovation test

The easiest pathway is to satisfy the ‘100-point innovation test’. As the name implies, you need to need get 100 points, with this ATO test table giving a breakdown on how points accrue.

Basically you are three-quarters of the way there if you are spending at lest 50% of revenue on eligible R&D activities or if you’ve received an Australian Government grant to commercialise.

The remaining points could be scraped together by the fact your business had support from eligible accelerator programme or if you have an enforceable patent or if shares have already been issued to non-associates.

For the details on the ‘100-point innovation test’ go here.

Long story short; if you are claiming R&D and have already issued shares then you are already likely at or near the required 100 points.

Pathway 2: ‘principles-based innovation test’

This is the ‘harder’, more involved, pathway which requires a private ruling from the Tax Commissioner which requires you to demonstrate (via a long-form written application) the following:

• That you are commercialising an innovation that is a product, process, service, or marketing an organisational method.
• There is high growth potential, such as in an emerging industry such as AI, VR or advanced manufacturing
• There is potential for scale and multiply revenue with minimal incremental cost
• Global potential that goes beyond local needs
• There is a competitive advantage with you able to beat the pants off others attempting to do the same thing

The types of documents that you could use as source information to help prove this would be a business plan, commercialisation strategy or competition analysis.

For the details on the ‘principles based innovation test’ go here.

End of the pathway, start on rewards

Once you’ve worked out that you qualify the rest is straight forward. You need to report to ATO by 31st July each year via an online form through the ATO business portal.

The ATO website has plenty of info if you require further background. For more details read the Early Stage Innovation Company (ESIC) ATO info.