Investors in BlueChilli startups are now eligible for new investor tax breaks, after the Sydney-based accelerator was the first company under the government’s early-stage investment company (ESIC) program.
The ATO has issued a private ruling confirming that BlueChilli is an eligible accelerator contributing to the growth of local early-stage innovation companies, meaning that investors in companies that have gone through BlueChilli that have raised at least $50,000 would be eligible for a series of tax incentives.
The tax deductions and capital gains tax exemptions for sophisticated investors in Australian startups were part of the in the National Innovation and Science Agenda, unveiled in late 2015.
Investors in an ESIC company are immediately able to receive a 20 per cent deduction of their investment, and are exempt from the capital gains tax if they sell their shares within 10 years.
To be an eligible ESIC, a startup must either complete a principle test or a points-based test. The points-based test requires a company to gain 100 points, with 50 points on offer to startups that have gone through an “eligible accelerator programme”.
The ATO has now ruled that BlueChilli is the first accelerator that is eligible under this program. An eligible accelerator must provide “time-limited support for entrepreneurs with a startup”, including training, mentorship, education and access to networks.
This program must be provided to applicants that are selected in an open, independent and competitive manner. The accelerator must have been providing the program for at least six months and have to have been completed by at least one cohort.
The other 50 points can be earned if a company has raised at least $50,000, has enforceable rights on an innovation through a patent, or has between 15 and 50 percent of its total expenses from the previous income year being counted as research and development.
This means that nearly all startups that have gone through the BlueChilli accelerator program can now offer these tax incentives to potential investors.
“The latest ATO private ruling is a huge win for sophisticated investors looking to amplify their returns. [It] will make it much easier for our startups to raise capital,” BlueChilli head of venture Luther Poier said.
“This is a boon for startups that go through our accelerator programs as they are more likely to have raised far more than $50,000 in their first round
BlueChilli CEO Sebastien Eckersley-Maslin said the organisation had been in discussions with the ATO for 12 months over the issue.
As it was the first accelerator to try to be listed, the discussions centred on what the programs should look like.
“The challenge the ATO had is that no-one had a definition of what an eligible accelerator was. We did a lot of work with them about understanding what an accelerator is and the difference between an incubator,” Mr Eckersley-Maslin told InnovationAus.com.
The ATO also completed full due diligence on BlueChilli’s program and curriculum.
“They got a good understanding of what we do and what our program is, and it sets the foundation for what future accelerators will need to look like. It was hard work being the first, but it was worth it,” he said.
The average startup that goes through the BlueChilli accelerator program goes on to raise a seed round between $300,000-500,000, Mr Eckersley-Maslin said, and these companies would now find it easier to find capital.
“It is really designed to make it easier and faster for investors to invest in startups. It’s about speed – investors looking to deploy risk capital have many, many options available to them, and this makes startups as an asset class more attractive,” he said.
The ATO now has a working definition based on five defining features: seed funding, cohort-based, co-location, structured program and mentoring.
To gain ESIC accreditation, an accelerator doesn’t necessarily have to all five of those features, with the final decision made on a case-by-case basis.
But to be an eligible accelerator, it must have a merit-based screening process, be completed by the company, not an individual, be time-limited and must have been running for at least six months with an existing cohort.
The other option for a company to be counted as an early-stage innovation company is the principle-based innovation test, which is self-assessed but can be later challenged by the ATO. This has proved to be an onerous process, and one that is riskier for investors, Mr Eckersley-Masin said.
BlueChilli is believed to be currently the only accelerator listed as an eligible program for the ESIC test, but Mr Eckersley-Maslin said he hoped more would follow in its footsteps.
“We see this as a foundation for the broader ecosystem. It’s nice to see one of these policy pieces that came through the ideas boom being implemented and accepted by the startup community,” he said.
“This is about growing the size of the piece. We need to get more investors to understand and be comfortable with investing in Australian startups. That’s better for founders, and valuations will be more favourable for them because there’s more competition,” he said.
“The more accelerators that adopt this and apply and get it, the better it is for everyone. We were happy to be first because no-one else was doing it.”
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