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Angel Investor Tax Break – expense capitalisation for accounting purposes

Capitalisation of expenses for accounting purposes

Brendan Giles highlights some potential issues for taxpayers seeking to use the new angel investor tax break.


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The new angel investor tax break provides qualifying investors with a 20 percent tax rebate and capital gains tax (CGT) exemption (for the first 10 years) when they invest in a company that qualifies as an early stage innovation company (ESIC).

To qualify as an ESIC, a company must assess itself against a number of criteria, as set out in Division 360 of the Income Tax Assessment Act 1997. One of those criteria is that the company’s total expenses must not have exceeded $1 million – either in its last year (if the company was incorporated within the last 3 years) or across the last three years (if the company was incorporated within the last 6 years).

The amount of expenditure capitalised for accounting purposes by potential ESICs will thus impact the calculation of ‘total expenses’ in their company tax return and therefore whether the $1 million expenses threshold is met in the following manner.

According to the Explanatory Memorandum, the calculation of ‘total expenses’ is based on the figure at item 6 of the company tax return as part of the total profit and loss calculation. Therefore, any expenditure that is capitalised for accounting purposes will not contribute to ‘total expenses’ in the company tax return and therefore not count toward the $1 million threshold.

What this demonstrates is there are factors relevant to the new angel investor tax break which are not immediately obvious. Potential ESIC’s and angel investors should carefully consider those factors and seek expert advice when assessing eligibility. The ATO is expected to release further guidance on the ESIC legislation in the near future.

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