Tax incentives for early stage investors
If you invest in a qualifying early stage innovation company (ESIC), you may be eligible for tax incentives. The tax incentives for early stage investors – often referred to as ‘Angel Investors’ – are contained in Division 360 of the Income Tax Assessment Act 1997.
The tax incentives provide eligible investors who purchase new shares in an ESIC with:
- Non-refundable carry forward tax offset equal to 20% of the amount paid for their qualifying investments. This is capped at $200,000 for the investor and their affiliates combined in each income year.
- 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 10 years may be disregarded. Capital losses on shares held less than 10 years must be disregarded.
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. If, after the company has satisfied these requirements, it ceases to be an ESIC, this won’t affect the investor’s entitlement to the early stage investor tax incentives for the shares.
In practice, if a company undertakes activities that meet the 100-point innovation test, this is likely to be the simplest way to determine its eligibility, when compared to the principles-based innovation test.
To meet the early stage test, the company must meet four requirements.
These requirements are tested at the point in time immediately after the company issues the shares to the investor. If a company doesn’t meet all of the requirements at that time, the investor won’t qualify for the tax incentives in relation to those shares.