The Start-Up Tax Break Most Aussie Expats Have Never Heard Of

Imagine the taxman handing you back 20 cents of every dollar you invest, then waving away the capital gains tax when that investment pays off years later. Sounds like a fantasy, or a scam. It’s neither. It’s a genuine, long-standing Australian tax incentive for backing early-stage start-ups, and here’s the kicker for you: it’s available even if you’re an expat living overseas.

You might have heard this described as a shiny new measure that was “about to be finalised”. That was a while ago. It’s been law since 1 July 2016, it’s no longer a novelty, and it’s quietly delivered serious tax breaks to investors ever since. So let’s clear up what it actually is, because the details matter and a lot of the write-ups floating around get a few things muddled.

What it really is (and what it isn’t)

First, a naming correction, because this one trips people up. The scheme is often compared to the UK’s Seed Enterprise Investment Scheme, and you’ll see the “SEIS” label thrown around. But Australia’s version isn’t called SEIS. It’s the tax incentive for early stage investors, and the companies you invest in are called Early Stage Innovation Companies, or ESICs. Get the name right, because searching for “Australian SEIS” will send you down a rabbit hole.

The idea is simple and sensible: start-ups struggle to raise money because banks won’t lend to a business with no trading history and no assets to secure a loan against. So instead of lending, the government nudges private investors to chip in equity, by dangling two genuinely juicy tax carrots.

Carrot one: a 20% tax offset

Invest in a qualifying ESIC and you get a non-refundable tax offset equal to 20% of what you put in. Put $50,000 into an eligible start-up and you’ve got a $10,000 offset to knock straight off your tax bill. It’s an offset, not a deduction, so it reduces your actual tax payable dollar for dollar, which is far more valuable than a deduction of the same size.

There’s a cap: the offset is limited to $200,000 per investor (and affiliates combined) per year under section 360-25 of the Income Tax Assessment Act 1997, which corresponds to a $1 million investment. If you can’t use the whole offset in the year you invest, the unused part isn’t lost; it carries forward to future years under the tax offset carry-forward rules in Division 65 of that Act. The leftover amount is the “excess” carried forward (section 65-30), and in a later year it reduces that year’s income tax in the normal order of offsets (section 65-35). There’s a technical step where a carried-forward offset is first applied against any “net exempt income” you have (section 65-10), but for most non-residents that’s a non-event: a non-resident’s net exempt income is limited to Australian-sourced exempt income (section 36-20(2)), and your overseas salary isn’t “exempt income” at all, it simply sits outside your Australian assessable income in the first place. Worth knowing too, the $200,000 annual cap looks at your current-year and carried-forward offsets combined, so you can’t dodge it by stockpiling. Non-refundable, by the way, just means the offset can reduce your tax to zero but won’t generate a cash refund beyond that.

Carrot two: a capital gains tax holiday

This is the one that really sings. If you hold your ESIC shares for at least 12 months and less than 10 years, any capital gain when you sell is disregarded entirely. Tax-free. If your start-up turns into the next big thing, the growth can be exempt from Australian CGT.

Two things to keep in mind. First, the trade-off: capital losses on shares held under 10 years are also disregarded, so if the start-up flops you can’t claim the loss. Start-ups are risky, and the tax system gives with one hand and takes with the other. Second, if you hold beyond 10 years, the CGT exemption stops and your cost base is reset to the market value at the 10-year mark, so gains after that point are taxable. Importantly, the $200,000 offset cap does not limit the CGT exemption; the exemption applies to all your qualifying shares.

The bit that matters most for expats: residency doesn’t lock you out

Here’s why this lands on an expat tax site. Unlike so many Australian tax concessions that slam the door on non-residents, the incentive itself is open to you regardless of your tax residency. Resident or non-resident, an individual, a company, a trust or a partnership can access it. But the two carrots aren’t worth the same to an expat, and it’s worth being honest about why.

The 20% offset is the one that does the heavy lifting for a non-resident, because it reduces Australian tax you’d otherwise pay. The catch is that an offset is only useful to the extent you actually have Australian tax to apply it against; if you’re a non-resident with little or no Australian-taxable income, there may be nothing for the offset to reduce (though it can carry forward to future years when you do).

The CGT exemption, by contrast, often does very little for a non-resident, and here’s the technical reason. Shares in an Australian company are generally not “taxable Australian property”, and under section 855-10 of the Income Tax Assessment Act 1997 a foreign resident disregards a capital gain unless the asset is taxable Australian property (the categories of which are listed in section 855-15). So a non-resident’s gain on ordinary ESIC shares would typically sit outside the Australian CGT net anyway. You can’t really be handed an exemption from a tax you were never going to pay. Where the CGT concession genuinely shines is for residents, or for someone who holds the shares across a change in residency, where the gain would otherwise be caught.

The upshot: for an expat, this is a reason to look closely rather than a free lunch. Claiming the offset still means engaging with the Australian tax system and usually lodging an Australian return, and how much either concession is really worth to you depends entirely on your residency and your Australian income. That’s a conversation worth having before you invest, not after.

The fine print worth knowing before you get excited

Two eligibility gates decide whether this works for you.

The company has to genuinely qualify as an ESIC at the time the shares are issued, which means passing an “early stage” test (broadly, recently incorporated, modest expenses and income, not listed) and an “innovation” test (either a points-based test or a principles-based one). The ATO is alert to contrived arrangements dressed up to look like genuine start-ups, so the company’s eligibility needs to be real, not creative.

And you usually need to be a “sophisticated investor” to invest freely. If you’re not, your total ESIC investment is capped at $50,000 in a year, and blow past that cap and you lose both the offset and the CGT concession for all your ESIC investments that year, not just the excess. That’s a brutal cliff, so non-sophisticated investors need to tread carefully.

The onus, by the way, is on you, the investor, to confirm the company qualified. So don’t just take a founder’s enthusiastic word for it over a pitch-deck and a flat white.

The bottom line

The early stage investor incentive is one of the more generous tax breaks going: a 20% offset up to $200,000 a year, plus a CGT exemption on gains for shares held between one and ten years. The incentive is open to expats regardless of residency, but be clear-eyed about what each part is worth to you: the offset is the real prize for a non-resident (assuming you have Australian tax to use it against), while the CGT exemption mainly benefits residents, since a non-resident’s gain on these shares is often outside the Australian CGT net anyway. Add in the genuine conditions (the company must actually be an ESIC, the sophisticated investor rules bite hard, and losses aren’t claimable) and the inherent riskiness of start-ups, and the message is simple: the tax break is a bonus on a sound investment decision, not a reason to make a bad one.

Tread your own path. Just make sure the start-up genuinely qualifies before you bank on the tax break.

Thinking of backing an Australian start-up from overseas?

The early stage investor rules are generous but unforgiving on the detail: whether the company actually qualifies as an ESIC, whether you meet the sophisticated investor test, how the offset and CGT exemption interact with the rest of your expat tax position. Getting it right means real tax savings; getting it wrong means missing out, or worse, claiming something you weren’t entitled to.

Our specialist expatriate tax team can check your eligibility and make sure the incentive is claimed correctly in your Australian return, wherever in the world you’re based.

Book an appointment with our expat tax specialists today and find out whether this break is one you can use. Your future self, and your hip pocket, will thank you.

General information only. This article doesn’t consider your personal circumstances and isn’t tax, financial or investment advice. Investing in start-ups carries real risk of losing your capital. Speak to our specialist expatriate tax team today, or with another registered tax agent and a licensed financial adviser, before acting.

References

1. Income Tax Assessment Act 1997 (Cth), Subdivision 360-A (tax incentives for early stage investors): section 360-15 (entitlement to the offset, including the 30% interest limit in paragraph 360-15(1)(f)), section 360-25 (amount of the offset and the $200,000 affiliate-inclusive cap), and sections 360-50, 360-60 and 360-65 (modified CGT treatment): austlii.edu.au
2. Income Tax Assessment Act 1997 (Cth), Division 65 (tax offset carry-forward rules): section 65-30 (amount carried forward), section 65-10 and section 65-35 (applying a carried-forward offset against net exempt income, then against income tax in the Division 63 priority order), and section 65-40 (company integrity restrictions). The priority order itself is in section 63-10. On why the net exempt income step rarely affects non-residents: section 36-20(2) (a foreign resident’s net exempt income is limited to Australian-sourced exempt income) and sections 6-5(3) and 6-10(5) (a foreign resident is assessed only on Australian-sourced income): austlii.edu.au
3. Income Tax Assessment Act 1997 (Cth), subsection 360-40(1) (the early stage innovation company qualification tests): austlii.edu.au
4. Income Tax Assessment Act 1997 (Cth), sections 855-10 and 855-15 (a foreign resident disregards a capital gain unless the CGT asset is taxable Australian property, and the categories of taxable Australian property): austlii.edu.au
5. Tax Laws Amendment (Tax Incentives for Innovation) Act 2016 (Cth) (No. 54, 2016), Schedule 1 (the amending Act that inserted Subdivision 360-A, effective 1 July 2016): legislation.gov.au
6. Australian Taxation Office, “About the tax incentives for early stage investors” (plain-English overview of the 20% offset and modified CGT treatment under Division 360): ato.gov.au
7. Australian Treasury, “Tax incentives for early stage investors” (National Innovation and Science Agenda measure, effective 1 July 2016): treasury.gov.au