Our friend Marc Loftus and his team from BDO’s Perth office have been celebrating recently after securing the first ruling from the ATO under the new Innovation Tax Incentive legislation. The ruling was obtained under the principles based test for Epic Delivery who are also listed here on Techboard. This article was first published by BDO.
The world today abounds with rapidly expanding opportunities for innovation, turbo charged by developments in the digital space. Businesses, governments and individuals alike are turning their attention to the significant benefits that technology and innovation are creating.
New markets and products, accompanied by a better understanding of consumers, in addition to the ever increasing number of channels available to connect with end users, makes for exciting times as an innovator or entrepreneur.
BDO is committed to supporting our home grown innovation community and stakeholders by utilising our skills, knowledge and expertise in this sector to assist members of the highly collegiate and motivated start-up scene in WA. Thereby jointly contributing to the bigger picture in raising the profile of Australia on the global stage, as a centre for investment in innovation and technology.
Epic Delivery and the New Tax Incentives for Innovation Legislation
One example of a pair of entrepreneurs grabbing these opportunities and running with them is Ryan O’Sullivan and Matthew Speering from Perth based Epic Delivery. Epic Delivery is a fresh, new, web-based service that allows users to have anything they want from nearby merchants, delivered straight to their door in minutes.
There are a number of interesting elements to this business from a BDO perspective, one of them being the involvement of part-time BDO employee, Matthew Speering as the CFO and an intrinsic part of Epic Delivery’s evolution. Another being the role BDO has played in preparing and submitting the very first ruling application to the ATO under the new tax incentives for innovation legislation to establish the qualification of Epic Delivery as an Early Stage Innovation Company (ESIC). We have recently been notified by the ATO that the ruling request has been approved, making Epic Delivery one of the first company’s in Australia to qualify as an ESIC.
Tax Incentives for Innovation and ESIC’s
This new legislation was designed and introduced to encourage new investment in Australian ESIC’s, via the following tax concessions for eligible investors:
- An upfront 20 per cent non-refundable tax offset on investment capped at $200,000 per investor, per year; as well as
- A 10 year capital gains tax exemption for investments held for 12 months or more.
With clear opportunities for both investors and companies—like Epic Delivery—the generous tax concessions give qualifying ESIC’s the opportunity to level the playing field by reducing the negative bias towards risk-taking businesses and allowing them to test new ideas and innovate, making them a more attractive investment option.
Pursuant to this legislation, a company will broadly qualify as being ‘early stage’ for the purposes of being an ESIC if it’s an unlisted company, less than 3 years old, with expenses of less than $1 million and assessable income of less than $200,000 in their last financial year. Companies up to six years old may also qualify however; they are subject to more onerous expenditure restrictions (see the legislation for further clarification).
The company then just needs to be ‘engaged in innovation’, which is established via either a principles-based test or a points-based test under a self assessment. The principles-based test is used to measure the following innovation factors relating to the business:
- Has the potential for high growth
- Has scalability
- Can address a broader than local market
- Has a competitive advantage.
As an alternative to satisfying this principles-based test, the legislation also introduces a ‘100 point innovation test’ whereby the company accumulates points according to a table of objective innovation criteria.
Further, and in the case of Epic Delivery, companies who do not wish to self-assess their innovation factors against the two tests outlined above may seek a ruling from the ATO as to whether they can satisfy the innovation requirements. BDO can assist with any such ruling application.
An ATO ruling provides prospective investors with the certainty that their investment will qualify for the incentives and it provides the company with similar assurance and protection against any potential misrepresentation.
Epic Delivery and ESIC Status
EPIC Delivery is in an enviable position having qualified as an ESIC. They are now able to raise funds from savvy investors looking to take up the generous tax incentives on offer and use them to take their innovative delivery company to the next level.
As a result of going through the ATO ruling application under this new legislation, we have gained practical knowledge and insight into the process including:
- How to best structure ruling applications to optimise the likelihood of a favourable outcome;
- Whether to self-assess, apply for a private ruling request or a product ruling;
- If self-assessing, whether to apply the 100 point innovation test or the principles-based test; and
- Potential opportunities to proactively restructure the development of your business’s intellectual property to assist in the likelihood of qualifying as an ESIC under this legislation.
Should you be interested in further information about the potential impacts of this new legislation as an innovative start-up company or an investor, please don’t hesitate to contact me.
Marc Loftus, Partner, Tax & Advisory, BDO