Stop whinging and get your ESIC tax breaks already

If I had a dollar for each time the startup community, including investors, complained about the federal government not doing enough for innovation, my favourite charity would be drowning in funds.

Take the federal budget as a recent example where many decried the government’s lack of support for innovation and ideas. The moaning and groaning was as predictable as sunrise despite a $1.1 billion funding package being announced (and broadly praised) in December 2015.

But there’s one big carrot dangling in front of us that’s been largely a mystery to the startup ecosystem and individual founders – Early Stage Innovation Company (ESIC) tax incentives – part of the $1.1 billion National Innovation and Science Agenda (NISA) package.

Nearly one year after coming into effect, the scheme continues to be grossly under utilised, with many founders unaware they even exist, as the Financial Review reported earlier this month.

This revelation comes as no surprise. The Turnbull government and its Innovation Minister, Arthur Sinodinos, and his predecessor Greg Hunt haven’t and didn’t do much to market or champion this scheme. Perhaps they’re trying to bury all things tied to innovation after there was lack of cut through with voters in the last election but that’s another story.

The job to promote this program has fallen on our laps; I’m happy to lead the charge if our government is asleep at the wheel.

Firstly, I’ve noticed mixed messages given to the startup and investment community by tax experts and this includes some of the biggest names in the business. In one instance, the advice by an accountant - who claimed to specialise in ESIC incentives – was rebuked by a startup that had recently gained ESIC status. 

My advice before starting this process is to speak with startups that have earned ESIC status and the advisers who helped get them there.

So why is being an ESIC important to a startup?

Firstly, it opens up new pathways to capital and much need cash flow because investors will receive tax incentives to invest in your company. This will benefit any type of investor, from family and friends to angel and venture capital.

Investors may be eligible for a 20 per cent tax offset (capped at $200,000 per investor per year for ‘sophisticated’ investors and $50,000 for other investors) and won’t be subject to capital gains tax for 10 years on the sale of an ESIC investment held at least 12 months.

Having ESIC status tells investors you have bags of potential and is an attractive investment tax-wise. There is no other scheme that’s this generous for investors in the taxation regime.

Successful ESICs and their advisers will tell you that two of the biggest ESIC misconceptions are:

- As a founder who’s pumped capital into their startup, you’re not eligible for ESIC tax incentives.

- A company must have high growth potential before it can qualify as an ESIC.

If a founder injects new funds and owns under 30 per cent of the company, they are eligible for ESIC tax benefits.

If your company passes the 100 point innovation test it can achieve ESIC status without having to prove high growth potential. Many are also unaware that companies can obtain 50 points if they are undergoing or have completed an eligible accelerator program.

The innovation test is cumulative which means companies don’t have to meet all the criteria to qualify.

The government, for all its shortcomings, has established a framework that’s quite generous to startups and investors. It’s time the community steps up to immediately help themselves instead of reverting to their default whinging mode.

Steve Baxter is an entrepreneur, investor, founder of technology start-up hub River City Labs and founding director of StartupAUS. He tweets at @sbxr. Steve is also a ‘shark’ on Shark Tank Australia which returns to Channel Ten on June 20, 8.30pm AEST.