Independent online platform ESIC Hub will begin to provide SMSFs with investment access to the new asset class of early-stage innovation companies (ESIC), which will also provide trustees with significant tax benefits.
From this month, high net worth and sophisticated investors, including SMSFs, are eligible for new tax incentives of up to $200,000 a year when they invest in an early-stage investment, following the unanimous passing of the Tax Laws Amendment (Tax Incentives for Innovation) Act in May.
Concessional tax treatment will be made available under the Corporations Act for sophisticated investors who support ESICs.
“From an architectural point of view, the private equity and venture capital market has typically been an industry that has offered very limited asset exposure and investment opportunities for the industry,” ESIC Hub founder Stephen Crowe told selfmanagedsuper.
“Our mantra is to push innovation into every sphere of the Australian community; it doesn’t need to be restricted to [a certain investor type] and the tax rules reflect that – retail and SMSFs who are not sophisticated investors can contribute up to $50,000 per annum into ESICs and qualify for the [tax benefits].
“The ESIC market is essentially an alternative market to what super funds would traditionally have.”
ESIC Hub was currently in discussions with three start-up companies that should be ESIC-ready by the end of the month, Crowe added.
Commenting on the role of ESICs in an SMSF portfolio, he said they should be considered an alternative asset.
“I’d be suggesting somewhere around the 5 per cent range would be appropriate for an SMSF investor – I’m not suggesting that SMSFs contribute 100 per cent of their asset allocation to this,” he said.
“They can enter this asset class for the purpose of getting some diversification, particularly in these volatile times.
“Because it’s an investment into an Australian unlisted growth company, which is effectively what an ESIC is, we’re looking for seed innovations to grow into the next Google of the world.
“It also offers a very nice tax incentive that the government has designed, with bi-partisan support, to encourage this flow of capital into hopefully a new start-up economy for Australia.”
ESIC Hub had the capability to service both direct SMSFs and the advisory channel via financial planners and accountants, he noted.
“The first step in this process is for people to become informed and [start to build their] knowledge set,” he said.
“We need to go through the traditional phase of education around this space and speaking with potential investors and advisers so that they see this as a legitimate program to encourage tax-based innovation incentives for investors to push capital into early-stage companies.
“We’re happy to offer advisers our resources to help them educate them about what ESIC means for their clients.”
To qualify for the tax savings, investors must obtain an ESIC certificate, issued by an appropriately qualified independent tax expert, prior to making any investment.
The government believed 4500 start-ups were missing out on equity finance each year and it was aiming to raise $1 billion in the first three years of the scheme, Crowe said.
Currently, the ESIC market was governed by the ATO due to the tax law requirements, as well as the Department of Industry, Innovation and Science from a regulatory point of view, he said.
ESIC Hub has developed free online tools for investors to help them understand the tax savings created by an ESIC investment.
