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Does a Qualifying Early Stage Innovation Company (ESIC) Need an ATO Private Ruling?

ESIC helps Aussie start-ups access great investor incentives that help with raising capital. A common misconception is that companies need an ATO private ruling to be qualified as an ESIC. Here we discuss the ESIC incentives and point out why that is not the case.

What are the ESIC Incentives?

For a start-up, qualifying as an Early Stage Innovation Company (ESIC) gives tax incentives to its investors when they purchase new shares during your equity capital raise stage. This helps innovative companies at the pre-seed, seed and angel investment stages because the ATO is giving the investors a nudge on their behalf. It’s like an ESIC grant for the investors.

The tax incentives include an immediate tax offset and favourable capital gains treatment. More and more, early stage investors are requiring that companies assess whether they are ESIC eligible.

You can find out more information on the benefits of ESIC on our BlueRock website.

How Do I Confirm If a Company is Qualified as an ESIC?

For companies, ESIC is a self-assessment scheme, meaning company leadership must research the incentives and make a diligent assessment of whether they are able to register as an ESIC. To help understand the law, save time and minimise risk, most companies engage tax and grants experts to help with their assessment. Here at BlueRock, we help businesses and investors understand the rules and apply them to each unique situation to determine eligibility.

For investors, you have your own set of rules, and just because a company is an ESIC, it doesn’t mean you qualify for the incentives. Speak to your tax advisor or get in touch with us to discuss your investment and eligibility for the incentives.

What Does a Company Need to Do to Apply as an ESIC?

After self-assessing that it qualifies under ESIC eligibility, a company only has one statutory ESIC form to lodge: it must submit an ESIC Report by 31 July each year for new shares issued in the previous financial year.

When it comes to ESIC eligibility, some companies choose to make an application to the ATO for a private ruling. The ATO’s private ruling system is how an entity can seek the ATO’s binding view on how tax laws apply to its specific situation.

What is an ATO Private Ruling?

The ATO issues taxpayers with legally binding views on how a tax law applies to a given scenario. The ATO becomes tied to the ruling, while the taxpayer is protected from penalty if they rely upon a relevant ruling in assessing their tax position. 

Rulings apply the facts and assumptions the applicant provides, so when these change or if facts are left out, the ruling is not binding on the ATO.

ESIC private rulings usually relate to the company’s ESIC eligibility by passing either or all of the early-stage test, 100-point innovation test or principles-based innovation test.

Do I Need an ATO Private Ruling for ESIC Eligibility?

No. In fact, the ATO has expressed a view that it thinks start-ups are unnecessarily using the private ruling system to determine ESIC eligibility.

Still, many companies take this path; despite the fact that it involves a significant investment of time and likely professional services fees, with no guarantee of a favourable outcome.

The problem with an ATO private ruling is that it only applies to the facts that the company has provided. One minor omission in the application or shift in the company’s situation can mean the ruling can’t be relied upon.

We think there is sometimes a need for these rulings, and they can be useful when the application of the law to the company is not clear-cut. However, in most cases, they are not needed. For example, a company might have reservations around whether its innovation is ‘scalable’ in the eyes of the ATO, so may seek an ATO private ruling to confirm this point.

What Does an ATO Private Ruling Cost?

While there is no cost for an application, specialist ESIC advisors will charge upwards of $5,000 for assistance with a ruling. Some companies encourage their prospective investors to pay for a ruling, given it is they who ultimately receive the incentives.

Want to Know More About the ESIC program or ATO Private Rulings?

Our BlueRock ESIC experts are available to discuss ATO private rulings and other questions you have in relation to ESIC eligibility or applications. Please get in touch with our BlueRock Grants & Incentives team for a no-obligation chat today.

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