The introduction of the tax incentives in July 2016 for investors in ESICs makes this type of investment tantalizingly more attractive than ever before. The tax incentives provide eligible investors who purchase new shares in an ESIC with two tax incentives.
The first incentive comes in the form of a ‘non-refundable carry forward tax offset’ equal to 20% of the amount paid for the newly issued shares and is capped at a maximum of $200,000 for the investor and their affiliates combined in each income year.
Modified capital gains tax (CGT) treatment
The second incentive is that if the qualifying shares are continuously held for more than 12 months and less than 10 years the capital gain may be disregarded. However, capital losses on shares held less than 10 years are also disregarded.
The maximum tax offset cap of $200,000 does not limit the shares that qualify for the modified CGT treatment.
Opportunity for ESICs
Often innovative ideas are developed by existing companies which finance the development of these products or services with additional capital raisings from existing or new shareholders or use loan facilities. Since the introduction of the ESICs tax incentives, this may not be the most tax effective strategy. Setting up a new company to develop the idea and taking advantage of the ESIC tax incentives provides a greater incentive for shareholders to introduce more capital.
If the development of these innovative ideas is successful, shareholders in the new venture can sell their shares either to external investors or back to the original company within the 10 year time frame and pay no capital gains tax. Selling the shares back to the original company would create a cost base equal to the market value of the shares at the time of sale in the original company.
There are a number of requirements to qualify as an ESIC and also for investors to be able to take advantage of the tax incentives.