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Hashing Talks to AFR About its ESIC Approval & 5 Angel Investors Partaking in their Capital Raise as a Result of ESIC Ruling

  • Published June 26, 2017 12:00AM UTC
  • Publisher Wholesale Investor
  • Categories Company Updates

Prominent tech entrepreneur Steve Baxter has urged start-ups to stop ignoring the generous tax breaks available to their investors if they achieve Early Stage Innovation Company (ESIC) status.

KEY TAKEAWAYS:

  • Investors in an ESIC are 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.
  • Founders or investors in a company are able to self-assess its ESIC status against a 100-point innovation test available on the Australian Tax Office website, or through a principles-based test on which an ATO private ruling can be sought.
  • Mr Baxter agreed that the ESIC scheme was poorly understood by founders and had been under-sold by the Turnbull government, which introduced it on July 1, 2016.

“Perhaps they’re trying to bury all things tied to innovation after there was a lack of cut-through with voters in the last election, but that’s another story,” he said.

“I’m happy to lead the charge if our government is asleep at the wheel, because having ESIC status tells investors you have bags of potential and are an attractive investment tax-wise.”

Mr Baxter said two major misconceptions had emerged in his discussions with start-ups.

“That as a founder who’s pumped capital into their start-up, you’re not eligible for ESIC tax incentives, and that a company must prove high-growth potential before it can qualify as an ESIC,” he said.

However, he clarified that if a founder injects new funds and owns under 30 per cent of their company, they are still eligible for ESIC tax benefits.

Meanwhile, the 100-point innovation test does not force start-ups to prove high-growth potential, although the principles-based test does.

While some early applicants for a private ruling on the principles-based test complained of a lengthy back-and-forth with the ATO, mortgage broker comparator HashChing got its ESIC tick two weeks ago and the process was effortless, according to co-founder Mandeep Sodhi.

“To be honest we copy-and-pasted the answers from our pitch deck, KPMG made sure it was all in the right format, and then there was a follow-up call with four ATO officers,” recalled Mr Sodhi.

“I think they just wanted to make sure we were consistent with our answers. They wound up the call in under half an hour and 24 hours later we got our private ruling.”

Mr Sodhi said five angel investors had been waiting on the ESIC ruling before signing off on a bridging round for the start-up, which will give HashChing runway into a $6 million raise it hopes to close around October.

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