ESIC: how do you qualify?

A profile photo of Beliz By Beliz | July 24, 2026

Founders are overlooking a major selling point when pitching to investors – tax.

In a separate article, we explored the significance of Australia’s tax regime for early stage innovation companies (ESICs) and why founders should think about ESIC early in their capital raise process: ESIC: an overlooked selling point for founders

The next question: how do you qualify?

Overview

Broadly, a company qualifies for ESIC if it satisfies the following immediately after it issues the shares relevant to the capital raise:

  • The early stage limb; and
  • The innovation limb (either via the 100-point test, or, the principles-based test).

Early stage limb

This limb is straightforward. The key criteria is that the company is an Australian private company that:

  • Was incorporated in the last 3 years;
  • Had assessable income of $200,000 or less (that excludes R&D clawback amounts) in the previous income year; and
  • Had total expenses of $1m or less (that includes both COGs and OpEx) in the previous income year.

The key point is that ESIC is aimed at genuinely early stage businesses.

Innovation limb

Here, the analysis is more nuanced. This limb can be satisfied through either the 100-point test or the principles-based test.

100-point test

This is the simpler pathway if the company can accumulate 100 points based on the below:

  • R&D expenses >50% of total expenses for the previous income year (75 pts)
  • R&D expenses ≥ 15% but <50% of total expenses for the previous income year (50 pts)
  • Has been part of an accelerator program (50 pts)
  • Has an agreement with a uni / research body (25 pts)
  • Has an Australian patent (25-50 pts depending on type of patent)

Principles-based test

Alternatively, the principles-based test requires a qualitative analysis of whether the company satisfies these criteria (as if often required if you issue shares shortly after incorporation):

  • Developing for commercialisation: The company is genuinely focused on developing for commercialisation one or more new or significantly improved products, processes, services, or marketing or organisational methods
  • High growth potential: The business relating to that innovation has high growth potential
  • Scalability: The company can demonstrate that it has the potential to successfully scale up that business
  • Broader than local market: The company can demonstrate that it has the potential to address a broader than local market (e.g. national, global)
  • Competitive advantages: The company can demonstrate that it has the potential to be able to have competitive advantages

Back it up (with evidence)

Be prepared to support each element of the innovation limb with evidence (irrespective of which pathway the company qualifies for).

Compile your supporting documentation before the round is complete, not after. Consider compiling it in a sub-folder in your data room. This can give investors more confidence in your ESIC position.

For the principles-based test, this typically looks like your pitch deck, financial model, early customer evidence, business plan, product roadmap, and GTM plan amongst other documents).

See further guidance from the ATO: Qualifying as an early stage innovation company

Report with the ATO

Qualifying is not the end of the process. 

If you issue shares on the basis that the company is an ESIC, you must lodge a report with the ATO by 31 July (being right after the end of the income year in which you issued shares). It requires the company to report to the ATO about how you qualify and who your investors are.

Don’t forget to lodge it. This is a short form, but it is critical to qualifying as an ESIC.

No two investors are the same

Lastly, remember that an investor’s own structure matters.

For discretionary trusts: It is not uncommon for early stage startups to raise from angel investors. Sometimes these are family trusts. For these trusts to claim the ESIC tax offset, the trustee must pass a trust resolution to distribute the offset by its relevant due date.

For ESVCLPs: It is common for some venture capital funds to be structured as early stage venture capital limited partnerships (ESVCLPs) under the tax rules. These investors cannot claim ESIC tax concessions as ESVCLPs benefit from a separate set of tax concessions. Note it could be possible for co-invest vehicles (“side car vehicles”) that are not ESVCLPs to claim ESIC.

The Shearwater logo