• Alexander Edmonds

TAX BACK! Fuel Innovation with tax incentives.

Updated: Aug 25, 2018

Tax incentives for Retail investors investing in Early Stage Innovation Companies:

One of the major advantages in investing in early stage innovation companies (ESIC’s from herein) is that you receive modified taxation treatment from the ATO. The main reason behind the modified tax treatment is to stimulate and encourage investment in these early stage companies, promoting innovation and growth in the Australian economy.

As sophisticated investors have had easy access to early stage companies for a while, recent CSF legislation has made it possible for retail investors to access these tax offsets as well. Therefore in this article we have decided to cover the bounds of tax offsets available to retail investors.

The two incentives that are available for ESIC investors are:

  • Non refundable carry forward tax offset equal to 20% of the amount paid for their qualifying investments.

  • Modified capital gains tax (CGT) treatment, under which capital gains on qualifying shares that are continuously held for at least 12 months and less than ten years must be disregarded.

Please note: There is a cap of $50,000 invested in a financial year for retail investors if they are to receive the tax offset. As outlined by the ATO this is to disincentivize retail investors who do not meet the sophisticated investors test to effectively “put all their eggs in one basket” or over-expose themself to a riskier asset classes.

Offset, not refund:

There is a difference between a tax refund and a tax offset. The key difference is that an offset cannot exceed the total tax payable and end up with the ATO forking up cash as a refund. However as the offset is a carry forward tax offset it means that you can use it to reduce your tax burden in subsequent years until you have exhausted the total offset.

Example retail investor:

With the limit in a financial year for a retail investors to invest (in qualifying companies) to still receive the taxation benefits being $50,000. The maximum tax offset a retail investor can receive in one year is $10,000. It's important to note that if someone exceeds this cap as a retail investor in a financial year they forgo any taxation benefits for all of the amount invested in that year!!! A heavy price to pay for overallocation to speculative investments.

Realistically you would not expect an average retail investor to reach this cap. Let's look at a real world scenario: In the 2016-17 financial year Tim has earnt a pre-tax income of $110,000 which has left him with a tax bill of around $30,000. With Tims investment in a few ESIC compliant companies during that year, summing to $25,000, Tim is able to reduce his tax burden by $5,000 to $25,000. This has a significant impact on Tim’s take-home salary, bumping it up from $80,000 to $85,000.

Alternative thinking: For you to get a positive return (not taking into account inflation) you would only require more than 80c on the dollar for any investment in an ESIC given the tax offset is achieved.

But what about my family trust?

The guidelines state that a member of a trust; either a beneficiary, unit-holder or object may be entitled to the early stage investor tax offset if:

  • They are a member of the trust or partnership at the end of the income year, and

  • The trust or partnership would be entitled to the tax offset for that income yar if it were an individual investor.

The amount of tax offset that you can claim is directly proportional to the amount of percentage ownership of the assets within the trust (usually determined by the trustee or the unit holdings). It is then the trustees duty to notify the member in writing of their share of the tax offset within three months of the end of the income year. This is a very important aspect as if there is no determination of the allocation of the offset, then there is no recourse by any member to the tax offset.

Accounting tip:

One important thing to remember when looking to claim the early stage investor tax offset is the carry forward rule. One should probably look to claim all tax offsets that cannot be carried forward before claiming the ESIC tax offset due to its ability to be offset in the subsequent financial year. This way there is potential to take advantage of as much savings as possible.

Investing in Early Stage Innovation Companies can be largely rewarding for investors in the long and short run with the prospect of substantial capital growth coupled with attractive taxation treatment. However an investor, whether it be retail or sophisticated must be careful before investing in an CSF round and make sure they read the offer document before proceeding. A ESIC complaint venture will always have its compliance status available for readers as a means of attracting capital raising.

Alexander Edmonds


GENERAL ADVICE: This publication is general information only, which means it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether a particular recommendation is appropriate for your needs before acting on it, and we recommend seeking advice from a financial adviser or stockbroker before making a decision.

PERFORMANCE: Past performance is not a reliable indicator of future performance. The value of any investment and the income derived from it can go down as well as up. Never invest more than you can afford to lose and keep in mind the ultimate risk is that you can lose whatever you've invested. The member pages may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified.

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