When setting up a company, most founders focus on product, hiring and capital. Structure often feels administrative. It isn’t.
At the outset, Australian startups typically choose between two models:
- A single trading company that owns the IP
- A HoldCo + IP Co + OpCo structure
Both are common. Both can work. But they optimise for different things.
A simple trading company that owns the IP is exactly that – simple. The same entity develops the product, owns the intellectual property and commercialises it. There are fewer agreements to draft, fewer intercompany transactions and lower ongoing accounting and tax complexity.
This simplicity becomes relevant when considering two Australian tax incentives: the R&D Tax Incentive and ESIC.
For R&D, the entity claiming the incentive must conduct eligible R&D activities and have sufficient rights to exploit the resulting IP. When the same company is doing the R&D and owning the IP, the narrative is clean. There is less risk of misalignment and generally less documentation required to demonstrate effective ownership and commercial benefit.
ESIC – the Early Stage Innovation Company regime – is more sensitive to structure.
ESIC provides two main benefits to eligible investors:
- A non-refundable tax offset equal to 20 percent of the amount invested, capped at $200,000 per investor per year.
- A capital gains tax exemption on shares held for between 1 and 10 years, subject to conditions.
For early stage companies raising capital, this can materially improve investor after-tax returns.
However, ESIC eligibility is assessed at the company level. The company issuing the shares must itself satisfy the requirements. These include being early stage, genuinely developing new or significantly improved innovations, and having the potential for high growth and commercial scalability. The ATO expects documentation to support this – business plans, projections, technical material, commercialisation strategy and evidence of market opportunity.
A recent 2024 Administrative Appeals Tribunal decision illustrates the risk of getting the structure wrong.
In that case, a Holding Co was interposed above an operating entity and an IP Co. Investors subscribed for shares in the Holding Co and sought to claim the ESIC tax offset. The Tribunal found that the Holding Co was not an ESIC. It was not conducting the innovation activities. It was financing and overseeing the group. The operating subsidiary was the entity developing and commercialising the software.
The fact that the group was tax consolidated did not change the outcome. Each company’s activities were examined on their own.
The practical implication is straightforward. If investors are subscribing into a HoldCo, but the innovation activity sits in an OpCo, ESIC eligibility may fail. If ESIC is important, the entity issuing shares must itself be the one genuinely developing and commercialising the innovation.
This is where the more complex structure comes in.
A HoldCo + IP Co + OpCo model creates clearer separation between shareholders, assets and trading risk. The IP can sit in a non-trading entity. Operational liabilities are contained in OpCos. For larger or more complex groups, particularly those operating across jurisdictions, this can make sense. It can also facilitate formal royalty and transfer pricing arrangements.
But that separation increases complexity. Intercompany licensing and development agreements must be carefully drafted. Transfer pricing needs to be maintained. R&D eligibility requires closer attention to which entity holds rights and economic benefit. And ESIC analysis becomes more complicated if innovation and ownership sit in different entities.
None of this makes the IP Co structure wrong. It simply means it is not neutral.
If ESIC is central to your capital strategy, structure needs to support it from day one. Retrofitting later can be difficult, and some restructures can compromise the capital gains benefits attached to ESIC shares.
If ESIC is not relevant, and asset protection is a higher priority, the additional layer of an IP Co may be sensible and relatively low cost to implement.
At inception, founders are effectively choosing what they want to optimise for – simplicity and incentive alignment, or additional structural separation and asset protection.
It is worth making that choice deliberately.
