Australia Venture Capital & ESIC Tax Guide
Australian venture capital and early-stage innovation company taxation. The guide covers: the Early Stage Innovation Company (ESIC) tax incentives — the ESIC is the company that meets the "ESIC criteria" under the "Tax Laws Amendment (Tax Incentives for Innovation) Act 2016"; the ESIC criteria include: (a) the "incorporation" within the last 6 years (or 10 years for the "R&D companies"), (b) the "expenditure" on the "eligible activities" of at least 15% of the total expenses for the "innovation expenditure" (the "R&D expenditure" or the "innovation expenditure"), (c) the "income" below $200,000 in the "last 3 years" (or the "expenses" below $1 million in the "last 3 years"), (d) the "assets" below $50 million (the "gross assets" of the company and the "connected entities"); the ESIC tax incentives include: (i) the "non-refundable carry-forward tax offset" at 30% for the "qualified investors" (the "sophisticated investors" and the "sophisticated venture capital investors") who invest in the "ESIC shares" (the "ESIC investments") — the offset is 30% of the "amount paid" for the shares (up to the "annual limit" of $200,000 for the "sophisticated investors"), (ii) the "10-year CGT exemption" (the "CGT exemption" for the shares held for at least 12 months and less than 10 years — the "capital gain on the disposal of the ESIC shares" is exempt from the CGT); the ESIC incentives are available to the "Australian resident" investors only; the Venture Capital Limited Partnerships (the "VCLPs") — the VCLP is the "limited partnership" that invests in the "venture capital" (the "venture capital investments" — the "early stage companies" and the "emerging growth companies"); the VCLP must be registered with the "Innovation and Science Australia" (the "ISA"); the VCLP must meet the "VCLP conditions" — the "partnership" must: (a) have the "committed capital" of at least $10 million, (b) invest at least 60% of the "committed capital" in the "venture capital entities" (the "eligible venture capital investments" — the "Australian start-ups" and the "SMEs"), (c) invest in the "eligible entities" (the "companies" with the "assets" below $250 million and the "activities" in the "eligible sectors"); the VCLP provides the "flow-through tax treatment" — the partners are taxed on the "share of the partnership income" and the "capital gains" at the partner's tax rate; the Early Stage Venture Capital Limited Partnerships (the "ESVCLPs") — the ESVCLP is the "early stage venture capital limited partnership" that invests in the "early stage companies" (the "ESIC-like" companies); the ESVCLP must have the "committed capital" of at least $10 million and invest at least 50% of the "committed capital" in the "early stage venture capital investments"; the ESVCLP provides the "tax exemption" for the "partners" — the "capital gains" and the "income" of the ESVCLP are "tax-exempt" for the "limited partners" (the "tax exemption for the ESVCLP partners"); the investment requirements for the ESIC — the "qualified investor" must: (a) be the "Australian resident" (the "individual", the "company", the "trust", the "superannuation fund"), (b) invest in the "ESIC shares" (the "newly issued shares" — the "new equity" — the "primary issuance"), (c) hold the shares for at least 12 months (the "minimum holding period" for the CGT exemption); the "annual limit" for the ESIC tax offset is $200,000 for the "sophisticated investors" (the "investors who meet the "sophisticated investor" test — the "net assets" of $2.5 million or the "gross income" of $250,000 per year) and the "non-sophisticated investors can invest up to $50,000 per year". All amounts in Australian Dollars (AUD). For related reading, see our Capital Gains Tax Guide → and Research & Innovation Tax Guide →.
ESIC Tax Offset — 30%
- 30% of investment: The "non-refundable carry-forward tax offset" is 30% of the "amount paid" for the ESIC shares. The offset is "non-refundable" — the offset can reduce the tax liability to zero, but the excess is "carried forward" to the future income years (the "carry-forward offset").
- $200,000 annual limit: The annual limit for the ESIC investment for the "sophisticated investors" is $200,000. The limit is $50,000 for the "non-sophisticated investors". The offset is capped at the applicable limit.
For the 10-year CGT exemption (the "CGT exemption for the ESIC shares"), see our Capital Gains Tax Guide →.
VCLP vs ESVCLP
- VCLP: The VCLP invests in the "venture capital entities" (the "eligible venture capital investments"). The VCLP has the "committed capital" of at least $10 million. The partners are taxed on the "flow-through" income and the capital gains. The VCLP does NOT provide the "tax exemption" — the partners pay the tax on the capital gains at the applicable rate.
- ESVCLP: The ESVCLP invests in the "early stage companies" (the "ESIC-like" companies). The ESVCLP has the "committed capital" of at least $10 million. The limited partners receive the "tax exemption" on the capital gains and the income (the "ESVCLP tax exemption"). The ESVCLP must be registered with the ISA.
For the registration of the VCLP and the ESVCLP with the Innovation and Science Australia, see the ISA website (www.industry.gov.au).