Investing in entities recognised as early-stage innovation companies (ESIC) can deliver significant tax advantages for SMSF members, according to a specialist fund manager.
“Investors who subscribe in new equity in an ESIC receive a 20 per cent tax rebate on their investment. That’s not a tax deduction, it’s a tax rebate. So that goes straight to a credit in your tax account,” ESIC Hub founder Stephen Crowe said.
This rebate can be claimed straight away if an individual or an SMSF has been assessed as having a tax liability in a relevant financial year, Crowe added.
“If you tax liability is below the 20 per cent, whatever the left over amount is you can carry forward, however, it is not refundable,” he said.
The rebate is capped at $200,000 for sophisticated or wholesale investors and $10,000 for retail investors.
“What that all means is if you’re a retail investor in Australia, you can invest in ESICs, but you can’t invest a dollar more than $50,000 per annum,” he noted.
“Wholesale or sophisticated investors have no cap on how much they can invest in ESICs, but the first million qualifies for the rebate.”
He pointed out the tax benefits do not consist of the rebate alone. An investment in an ESIC also carries an exemption from any capital gains the ESIC generates for the first 10 years, he said.
He suggested these tax benefits are potentially even more attractive given the current political climate in Australia.
“[There is a] very high probability a Labor government will be voted in next year and we know what they stand for – higher taxes,” he noted.
“Negative gearing will be gone, refundable franking credits may be gone, and we know the capital gains tax (CGT) is going up.
“We’ve got a very sweet spot here to be in a position to take advantage of what we know is much likely to occur, but even if Labor doesn’t get up, we’re still looking at CGT-free gains and a 20 per cent tax rebate.”