Background

Division 360 gives a qualifying investor a 20% non-refundable carry-forward tax offset, subject to a combined annual cap of $200,000 for the investor and affiliates. It also allows the whole capital gain on qualifying shares to be disregarded where the shares are held continuously for at least one year and disposed of before the tenth anniversary of issue.

The 2026 CGT reforms increase the relative value of that CGT exemption. Treasury recognises that indexation may provide limited relief for start-up shares with a low cost base and substantial real growth over a short period. In that context, ESIC now does roughly twice the work in exemption terms: 100% of the qualifying gain will be disregarded, compared with 50% under the former general discount.

Key Issues

1. Which company and point in time must satisfy the ESIC rules?
2. Can a restructure or later review create or recover eligibility?
3. Who may fall outside ESIC but within the proposed new Innovative Business CGT Concession?

Common Misconceptions

1. “Once an ESIC, always an ESIC”

The issuing company must qualify immediately after the particular share issue. Later growth beyond the thresholds does not taint earlier qualifying shares, but an earlier qualifying round does not protect a later one. Every issue, top-up and conversion requires a fresh test.

2. “A head company qualifies because its subsidiary is innovative”

An investment can be made in a head company only if that company itself qualifies. The issuer and its 100 per cent subsidiaries are aggregated for the prior-year expense and assessable income limits, but the innovation limb is directed to the issuer.

A subsidiary’s work may support the head company where the parent has a genuine commercialisation role, such as owning the intellectual property and engaging the subsidiary to perform development services. The legislation permits an issuer to demonstrate matters through another entity’s services. It does not allow the parent simply to borrow the subsidiary’s status.

3. “A new company creates a clean ESIC reset”

A newly incorporated company may have no prior-year expenses or assessable income. However, if the old operating company becomes its 100 per cent subsidiary, that subsidiary’s prior-year amounts are included. The new issuer must also satisfy the innovation test on its own facts.

Only newly issued shares in the new company can qualify. Existing shares do not become ESIC shares through a reorganisation. A genuine restructure may work because the resulting facts meet the legislation, but there is no automatic 'refresh'. Part IVA and the effect of CGT roll-overs under Subdivision 122-A and Subdivision 124-M on existing ESIC treatment also require review.

4. “If nobody identified ESIC at the time, it is too late”

Not necessarily. Entitlement turns on the facts immediately after issue, not on obtaining an ESIC 'certificate'. If the company and investor actually satisfied the tests, a claim or amendment may remain possible within the applicable amendment period, and any outstanding company reporting should be addressed.

Later achievements cannot cure an earlier failure. Contemporaneous cap tables, accounts, subscription documents, business plans, intellectual property records and commercialisation evidence must support the position at issue. The annual company report is generally due by 31 July, but it is a separate compliance obligation.

5. “Founder shares are automatically excluded”

Founder shares can qualify in principle, including shares issued at incorporation, but all investor tests apply. The founder and company must not be affiliates, the shares must not be ESS interests, and the founder must not hold rights exceeding 30 per cent of income, capital or voting power in the company or a connected entity.

Directorship alone does not establish affiliation. A sole founder with 100 per cent plainly fails the ownership test. Exactly 30 per cent is not 'more than' 30 per cent, although the affiliate test may still apply. Later dilution does not retrospectively qualify the original shares.

6. “A note, SAFE or option qualifies when the cash is paid”

The investor must be issued an equity interest that is a share. For a conventional convertible note, the relevant date is conversion. An option ordinarily requires exercise and a share issue. A Simple Agreement for Future Equity (SAFE) must be analysed by legal effect, but advancing cash for future shares is not enough by itself.

The company may therefore qualify when funding is advanced but fail by the time shares are issued.

7. “The $50,000 retail limit merely caps the benefit”

For an investor who does not meet the relevant sophisticated or wholesale investor pathways, $50,000 is a maximum. If total relevant ESIC investments for the income year exceed $50,000, the investor loses both the offset and modified CGT treatment for all affected shares issued in that year, including the first $50,000.

The separate $200,000 annual cap limits the offset. It does not itself limit the shares receiving modified CGT treatment.

8. “The CGT exemption lasts forever and preserves losses”

The exemption applies only where shares are held continuously and the CGT event occurs on or after the first anniversary but before the tenth. Capital losses before the tenth anniversary are disregarded. On that anniversary, the cost base resets to market value.

Some rollovers preserve the ESIC treatment, but Subdivision 122 and Subdivision 124-M rollovers do not. Parcel dates and restructure mechanics therefore matter well before an exit.

What does the proposed Innovative Business CGT Concession change?

The proposed measure is officially called the Innovative Business CGT Concession (IBCC). Consultation closed on 10 July 2026 and final legislation has not been released. As proposed, it would give eligible investors a 50% discount on nominal gains from qualifying shares and options.

Broadly, the issuer would be unlisted, independent, active and innovative, with turnover below $50 million and generally less than ten years of incorporation. A five-year holding period and a $10 million lifetime cap on gross qualifying gains would apply. What is meant by 'independent' is currently unclear.

The main groups potentially covered by IBCC but not ESIC are:

• founders excluded by ESIC’s 30 per cent or affiliate rules;
• ESS and ESOP participants;
• option holders; and
• investors in businesses that exceed ESIC’s $1 million prior-year expense or $200,000 prior-year assessable income limits but remain below $50 million turnover.

It may also cover older start-ups, with Treasury considering up to 15 years for biotech, medtech and defined deep-tech businesses. The consultation paper does not presently reproduce ESIC’s 30 per cent and affiliate exclusions, but the final design may change. Website

IBCC would be a second pathway, not a replacement. ESIC offers an upfront offset and a full gain exemption after one year. The proposed IBCC offers a 50 per cent discount after five years and is capped. Businesses should continue testing ESIC rather than reorganising or delaying a raising in reliance on an unlegislated concession.

Takeaways

• Test every share issue and conversion separately, using evidence that existed at the relevant time.
• Ensure the entity issuing the shares can substantiate the innovation case. In a group, align intellectual property, contracts and commercialisation responsibility with the intended issuer.
• Model restructures before implementation, including subsidiary aggregation, investor ownership, Part IVA and rollover consequences.
• Review historic share issues that were never assessed for ESIC. A missed label is not necessarily fatal, but evidence, amendment periods and reporting require prompt attention.
• Secure ESIC where available while monitoring the proposed IBCC’s final rules and transition arrangements.

To discuss ESIC eligibility or the proposed Innovative Business CGT Concession, please contact Velocity Legal’s tax team.