05 Oct Tax incentive for early stage investors (TIESI)
The Tax Incentive for Early Stage Investors (TIESI), was enacted in December 2015 as part of the Australian Government’s National Innovation and Science Agenda (NISA). What are the benefits and who is eligible?
It has been nearly a year since the Government released NISA, a package of measures designed to develop a culture of entrepreneurship and innovation. One of these measures, TIESI, has been gaining traction.
TIESI tax benefits
The TIESI measure provides tax incentives for investors in early stage innovation companies. Investors who qualify:
- Receive an attractive ‘non-refundable’ carry-forward tax deduction of 20% of the cost of new shares up to a maximum cap of $200,000.
- May disregard capital gains realised on shares in early stage innovation companies up to ten years. But on the downside, investors lose the ability to claim capital losses on these shares if held for less than ten years.
What does ‘non-refundable’ mean?
Simply put, investees need to have tax liabilities against which to apply the 20% offset. If an investee doesn’t have any other tax liability, there isn’t an immediate tax benefit in the TIESI. However, as the 20% offset can be carried forward, the tax benefit is not lost but can be used at some future time when a tax liability arises. Who is an eligible investor? All forms of investors are eligible to claim the incentive other than ‘widely held’ entities – individuals, companies, trusts and partnerships – provided they meet the ‘sophisticated Investor’ test under the Corporations Act 2001.
A ‘sophisticated investor’ is a type of investor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity. They are required to meet an asset and taxable income threshold that enables them to be approached without having to receive an official prospectus on a potential investment. This type of investor can claim the TIESI up to $200,000 – in other words, for investments up to $1,000,000. Retail investors can still also participate but their cap is only $50,000 rather than $200,000.
Qualifying as an investee company
To access the TIESI tax benefit, the investor has to invest in shares issued in a qualifying Early Stage Innovation Company (ESIC). To be an ESIC, there are two ‘limbs’ that must be satisfied:
- The company must be Australian incorporated and be at an early stage of development (the early stage limb) and
- Developing new or significantly improved innovations with the purpose of commercialisation to generate economic returns (the innovation limb).
There are specific objective tests for each limb:
- For the early stage limb, the company must be newly incorporated, have incurred less than $1,000,000 total expenses in the prior year, earned less than $200,000 assessable income in the prior year, and not listed on the ASX.
- For the innovation limb, there is a principles-based test which means the company is developing a new or significantly improved innovations such as a product, process or service and the company needs to substantiate that position.
To provide certainty, there is also an objective ‘100 points’ test. Once the company has at least 100 points for meeting certain objective criteria, it can consider itself an ESIC. Finally, a company can get absolute certainty by applying for a tax ruling.
Both investors and ESICs may require professional advice to determine whether they satisfy the criteria. Accru can help investee companies at every stage – from the assessment process, to applying for a ruling and the company’s reporting requirements. Please contact an Accru Asia advisor if you would like to know more.