- Guide 4 of 5
- Income Tax Assessment Act 1997, Subdivision 360-A; Taxation Administration Act 1953, s 396-55
- Checked 10 October 2026
Early stage innovation companies: the tests, the investor’s offset and the company’s report
A company is an early stage innovation company (ESIC) when it meets section 360-40(1) of the Income Tax Assessment Act 1997 immediately after it issues shares: recently incorporated or registered, with expenses of $1 million or less and assessable income of $200,000 or less in the previous income year, unlisted, outside the Corporations Act’s meaning of a foreign company, and passing an innovation test. The tax offset goes to the investor, not the company; the company’s duty is to report to the ATO after each financial year in which it issues shares that could give rise to the offset.
General information only, not tax or investment advice, and nothing here is a reason to invest in any company. The official place to check is the ATO’s page on qualifying as an ESIC.
The early stage test, in the Act’s words
The gate is section 360-40(1), read here as compiled on 27 August 2026. Its six paragraphs, (a) to (f), must all be met:
(a) the company was: (i) “incorporated in Australia within the last 3 income years (the latest being the current year)”; or (ii) “incorporated in Australia within the last 6 income years (the latest being the current year), and across the last 3 of those income years before the current year it and its 100% subsidiaries (if any) incurred total expenses of $1 million or less”; or (iii) “registered in the Australian Business Register within the last 3 income years (the latest being the current year)”; and
(b) “the company and its 100% subsidiaries (if any) incurred total expenses of $1 million or less in the income year before the current year”; and
(c) “the company and its 100% subsidiaries (if any) had a total assessable income of $200,000 or less in the income year before the current year”; and
(d) “at the test time, none of the company’s equity interests are listed for quotation in the official list of any stock exchange in Australia or a foreign country”; and
(e) the innovation test: 100 points or more under section 360-45, or the five principles-based limbs set out below; and
(f) the company falls outside the Corporations Act 2001 meaning of a foreign company, at the test time.
Income Tax Assessment Act 1997, s 360-40(1)
Two more subsections narrow the test. Under section 360-40(4), subsection (1) does not apply to a company that, before the test time, engaged in an activity of a kind prescribed by regulations. Under section 360-40(3), the principles-based limbs cannot be met for a product, process, service or method, or an improvement to one, of a kind prescribed by regulations.
Two ways through the innovation test
The first is the 100-point test in section 360-45. All eight items, with their points:
| Item | Points | The criterion, in short |
|---|---|---|
| 1 | 75 | At least 50% of last year’s total expenses is notionally deductible R&D spending (s 355-205) |
| 2 | 75 | An Accelerating Commercialisation Grant received under the Entrepreneurs’ Programme |
| 3 | 50 | 15% or more, but under 50%, of last year’s total expenses is that R&D spending |
| 4 | 50 | Completing or undertaking an accelerator program that meets the item’s conditions on the program, its selection of entrepreneurs, and its provider (6 months of such programs, at least one cohort completed) |
| 5 | 50 | At least $50,000 paid for shares issued, at least a day before the test time, to entities that were not associates and did not acquire them mainly to help another entity get the offset |
| 6 | 50 | Rights as patentee or licensee of a standard patent, or owner or licensee of a plant breeder’s right, granted in Australia in the last 5 years, or equivalent foreign rights |
| 7 | 25 | Unless item 6 applies: rights in an innovation patent granted and certified, or a registered design, in Australia in the last 5 years, or equivalent foreign rights |
| 8 | 25 | A written agreement with a listed higher education body, or a registered research service provider, “to co‑develop and commercialise a new, or significantly improved, product, process, service or marketing or organisational method” |
Section 360-45(2) adds any points that regulations prescribe, where the prescribed innovation criteria apply at the test time.
The ATO calls the 100-point test “an objective test” that “should be self-assessed”, and likely the simplest route.
The second is principles-based. Under section 360-40(1)(e), the company must be genuinely focussed on developing for commercialisation new or significantly improved products, processes, services, or marketing or organisational methods; the business must have a high growth potential; and the company must be able to show the potential to scale it, to address a broader than local market, and to have competitive advantages. The ATO expects that shown from existing documents, such as a business plan, and a company may ask it for a ruling on this test.
What the law gives the investor
Under section 360-25(1), the investor’s offset is “20% of the sum” paid for the shares, in money or non-cash benefits. Section 360-25(2) reduces it so that the investor’s and its affiliates’ offsets for the year, with any carried forward, do not exceed $200,000. Section 360-20 shuts out an investor who paid “a total of more than $50,000” in the income year, unless section 708(8), (10) or (11) of the Corporations Act removed the need for a disclosure document for an offer. Section 360-15(1) leaves out, among others, trusts, partnerships and widely held companies, affiliates of the company, and employee share scheme shares.
The ATO puts the onus on the investor to confirm that the company qualified at the test time. And it warns that a ruling “should not be used in promotional materials to imply that we guarantee or endorse investment in your company.”
The company’s report
Section 396-55 of Schedule 1 to the Taxation Administration Act 1953 (compiled 27 August 2026), table item 10, makes “a company” report on “the issuing by the company of a share that could give rise to an entitlement to a tax offset (or a modified CGT treatment) under Subdivision 360‑A”. The report is in the approved form, covers the financial year, and is due on or before “the 31st day after the end of that period”, unless the Commissioner sets another period or time by legislative instrument. The ATO puts it as “31 days into the following financial year (this is generally 31 July)”, lodged electronically.
- Submitting the form declares that the company meets the ESIC requirements for every reported investment.
- Submitting it knowing the company does not meet them “could result in penalties, including possible criminal penalties, under the tax law.”
- An investor the company knows is not entitled, such as an affiliate or one issued shares through an employee share scheme, is left off the form.