Tax incentives for start-up investors
Tax incentives may be available to investors that are considering putting their money into qualifying start-up businesses. Eligible businesses are defined by the ATO as early-stage innovation companies (ESICs).
The two key tax incentives for eligible early-stage investors, also known as ‘angel investors’, who purchase new shares in an ESIC are:
- Non-refundable carry forward tax offset that is equal to 20% of the amount paid for their qualifying investments. This offset is capped at a maximum amount of $200,000 for the investor and their affiliates combined in each income year.
- Modified capital gains tax (CGT) treatment, where capital gains on qualifying shares that have been continuously held for at least one year may be disregarded. Capital losses on shares that have been held for less than ten years must be disregarded.
Note that the maximum tax offset of $200,000 does not limit the shares that qualify for the modified CGT treatment.
The early-stage investor tax incentives are available to both Australian resident and non-resident investors. To qualify for the tax incentives, investors must have purchased the shares in a company that meets the requirements of an ESIC immediately after the shares are issued. They must be issued on or after 1 July 2016.
For investors who are in a trust or partnership, special rules apply so that the entitlement to the tax offset will flow through to the members of the trust or partnership. For superannuation fund investors, the trustee of the fund would be entitled to the tax incentives, but not the fund’s members.
The requirements for a qualifying ESIC include that it is an Australian-incorporated company and that it satisfies both elements of a two-limb test. These are an ‘early-stage’ limb and an ‘innovation’ limb. The targeting is designed to focus on innovative start-up companies with high growth potential, rather than low-risk and low-growth companies. For businesses or investors who are unsure, the ATO has also provided an early stage innovation company decision tool on its website.