On Tuesday May 9th, 2017 Georgia King-Siem from KPMG and Erc Pepicelli from the ATO came to Stone & Chalk to talk about the Angel Investor Tax Incentive and Early Stage Innovation Companies (ESIC). Read more here to find out what ESIC means for startups and what it takes for a startup to qualify…

Left to Right: Georgia King-Siem (KPMG) and Erc Pepicelli (ATO) present at Stone & Chalk

First things first. What in an ESIC?

It may not be as easy as you think to qualify as an ESIC. In fact, it’s possible to qualify one year and not the next. There are two limbs that must be satisfied for a startup to qualify as an ESIC:

1. Early Stage Limb (early stage nature of the startup)

2. Innovation Limb (start up’s level of innovation and market potential)

Companies must satisfy the early stage limb before they can test if they satisfy the innovation limb. If they do not satisfy the first limb, it is impossible to satisfy the innovation limb.

#1: Early Stage Limb

There are three requirements for a startup to qualify as an ESIC under the early stage limb.

Incorporation.

Incorporated <3 years (or <6 years as long as total expenses across the last 3 years are <$1M).

Income/Expenses.

Total assessable income ≤$200k in prior income year and total expenses <$1M in prior income year (includes any wholly owned subsidiaries).

Listing.

Not listed on any official stock exchange.

#2: Innovation Limb

If the early stage limb is satisfied, startups can now see if they qualify under the innovation limb. For the innovation limb, a company must satisfy…

either the 100 points test or the principles based test.

Most companies prefer the 100 points test because it is easier to quantify and determince eligibility. However, the principles based test is a valid alternative.

100 Points Test

Companies have the opportunity to gain points from various sources.

75 points if:

  1. At least 50% of the prior year’s expenses were eligible R&D expenditure; or

2. The company has received an Accelerating Commercialisation Grant.

50 points if:

  1. 15% to 50% of the prior year’s expenses were eligible R&D expenditure; or

2. The company has completed or is in an eligible accelerator program; or

3. A third party has previously invested at least $50,000 in company shares; or

4. The company holds a standard patent or plant breeder’s right (Australian or foreign).

25 points if:

  1. The company hold innovation patent or a registered design (Australian or foreign); or

2. Party to a collaborative agreement with registered research service provider or a higher education organization to commercialise an innovation.

Principles Based Test

Companies can self assess against 5 innovation principles:

New or significantly improved

Innovation must be either new or significantly improved for the applicable ‘addressable market’ (defined as available revenue opportunity or market demand arising from the innovation).

Addressable market must be objective and realistic (e.g. if it is for the Australian market then the innovation must be new or significantly improved for that region).

Scalability

ESIC must have potential to successfully scale its business and needs to have operating leverage (i.e. existing revenues can be multiplied through incurring reduced or minimal increase in operating costs) in order to increase its share of the market and/or enter into new markets.

High growth potential

ESIC must show potential for high growth within a broad addressable market (as distinct from typical small to medium enterprises such as cafes, local retail stores and local service providers, that service a single local market).

Broader than the local market

ESIC must demonstrate potential to address a market that is broader than a local city, area or region. While the ESIC does not need to have a serviceable market at a national, multinational or global scale at the test time, it does need to show that this business can be adapted to a national, multinational or global scale in the future.

Commercialisation

ESIC must be focused on developing its innovation for a commercial purpose (i.e. purpose of generating economic value from that idea).

Commercialisation encompasses spectrum of activities including those leading to the sale of new or significantly improved product, process or service as well as activities involving the implementation of a new or significantly improved process or method, where the process or method directly leads to the generation of economic value for the company.

Defining innovation

Implicit in the definition of innovation is the requirement that the company is genuinely focused on developing a new or significantly improved type of innovation such as a product, process, service, marketing or organisational method.

Check out more information here: http://lets-talk.ato.gov.au/ESIC?page=1

Thanks again to KPMG and ATO for visiting Stone & Chalk!