Tax incentives for early stage investors

Tax incentives for early stage investors

An Early Stage Innovation Company has introduced attractive taxation benefits for investors.

Investors will qualify for two separate tax incentives if they invest in Australian innovation companies, being a tax offset of 20% of their investment value as a non-refundable tax offset, capped at $200,000 for sophisticated investors and $10,000 for retail investors.

When the investor disposes of their investment, they may be exempt from capital gains tax if the shares are held for longer than twelve months and less than ten years.

A retail investor is only able to invest up to $50,000 per annum per company to be able to access the tax concession.

If an investment is made by a retail investor which exceeds the $50,000 investment threshold, the investor will not receive the early stage investor tax offset nor the capital gains tax concessional treatment.

The government introduced these clauses to the legislation to discourage retail investors from being over exposed to the risk that is inherent in investing in early stage innovation companies.

There are no restrictions on a sophisticated investor.  Sophisticated investors can invest more than $1M per company per annum, if they wish, but the maximum tax offset is $200,000.  The tax offset is a non-refundable tax offset which can reduce an investor’s tax payable to zero but cannot result in a tax refund on its own.  If the offset is not used in one year, the remaining amount will be carried forward to future income tax years.

When an investor disposes of shares in a qualifying early stage innovation company, a capital gain will be ignored if the investor complies with the time holding requirements:

  • shares held for less than 12 months and sold will give rise to a capital gains tax event
  • shares held for longer than 12 months and less than 10 years will allow the investor to disregard any capital gain in relation to the shares
  • shares for longer than 10 years will give rise to a capital gains tax event, however a cost base uplift of the market valuation of the shares will incur on the 10th year anniversary of the shares being issued to the investor.

Investors cannot obtain the tax incentives in certain circumstances, including:

  • the shares were not purchased in the early stage innovation company directly from the company as new or issued shares
  • the shares are not an “equity interest” in an early stage innovation company
  • the investor is a widely held company or a wholly owned subsidiary of a widely held company
  • the total investment for the income year is more than $50,000 and the investor is not a sophisticated investor in accordance with the Corporations Code
  • the investor and the early stage innovation company are affiliates of each other at the time the shares are issued
  • the investor holds more than 30% of the equity interest in the early stage innovation company and other entities associated with early stage innovation companies
  • the shares in the early stage innovation company were acquired under an Employee Share Scheme

If you wish to obtain additional information on early stage innovation companies, as they relate to investors and any other information, you are invited to visit – www.esssmallbusiness.com.au.

Peter Towers, Director, ESS BIZTOOLS

Peter Towers
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