On 28 September 2026, the consultation period closed in relation to draft legislation for the proposed Innovative Business CGT Concession (IBCC). The exposure draft contains some new defined terms, including “IBCC Asset” and “IBCC Company”. The definition of an IBCC Company pulls some concepts from the innovation limb of the Early-Stage Innovation Company (ESIC) regime which has been around since 2018.

This article provides an explainer of the proposed IBCC regime, a refresher on the ESIC regime, and a comparison between the two regimes.

ESIC Refresher – Benefits

There’s an understandable desire to be an early-stage innovation company, as it opens the door for two potential tax benefits for the investor that significantly increase the attractiveness of an investment.

The first is a non-refundable carry-forward tax offset equal to 20% of the amount invested in the ESIC, capped at a maximum annual investment of $1,000,000. This provides investors with an immediate ROI of up to 20% on ESIC shares.

The second is modified CGT treatment being applied to the ESIC’s shares issued to you, such that capital gains tax is effectively eliminated for sales of ESIC shares held for 12 months and sold before the tenth anniversary of ownership. This significantly increases the upside potential for investors who receive ESIC shares, as the modified CGT treatment extends to all ESIC shares issued to an investor, even if their upfront tax offset is limited to the first $1,000,000 invested.

ESIC Refresher – Company Eligibility

A company must be an ESIC at the time of a share issue for an investor to receive the above benefits. The investor must also pass some investor specific tests to receive the benefits.

There are two broad tests a company needs to pass to be considered an ESIC at a point in time: the early-stage test and the innovation test.

For the early-stage test, the company must meet requirements at the test time relating to:

• Incorporation date or ABR registration: within the last 3 income years*
• Prior year expenses: under $1 million in previous income year
• Prior year assessable income: under $200,000 in previous income year
• Equity interests: none listed on an official stock exchange

*For incorporation date only, window is extended to 6 income years if the company & its 100% subsidiaries incurred expenses of less than $1 million over the previous 3 income years combined.

For the innovation test, the company must either:

• Have 100 ‘points’ at the test time based on objective points-based criteria specified in s360-45 ITAA 1997 (earned via having sufficient prior year R&D expenditure, patents, outside investment, business accelerator programs, etc.)
• Be able to demonstrate satisfaction of the five innovation principles specified in s360-40(1)(e) ITAA 1997 at the test time, being
  • Genuine focus on developing an innovation
  • High growth potential
  • Business scalability
  • Broad potential market
  • Competitive advantage

While the 100-point test consists of bright-line criteria, there is some degree of subjectivity with respect to the five-principles test. This subjectivity is often resolved via an application to the ATO for a private ruling.

ESIC Refresher – Investor Eligibility

Investors looking to receive ESIC benefits must meet requirements at the test time relating to:

• Affiliate relationships: cannot be an affiliate of the ESIC, or vice versa
• Employment relationships: the shares cannot be issued under an employee share scheme
• Shareholding percentage: cannot hold more than 30% of shares in company immediately after the issue
• Sophisticated investor status: cannot invest more than $50,000 in ESIC’s annually if not a sophisticated investor

IBCC Explainer – Benefits

The proposed IBCC regime would introduce a 50% discount in respect of capital gains that fall into the regime.

The 50% discount would not stack with indexed cost bases. Eligible taxpayers will need to make a choice between the benefit of the 50% discount or the benefit of the indexed cost base.

IBCC Explainer – Eligibility

In the basic case, the IBCC regime broadly applies to a capital gain if:

• It was made by an individual or a trust
• It was made by an Australian resident
• It was made after 1 July 2027
• The CGT asset being disposed of has been held for at least 12 months
• The CGT asset being disposed of is an “IBCC Asset”
• The IBCC asset is not a disqualified asset

IBCC Explainer – IBCC Assets

To be an IBCC asset, the CGT asset must meet the following criteria:

• The asset must be ‘at risk’ (aka the entity holding the asset has no arrangement as to the maintenance of the value of the CGT asset or the maintenance of any earnings or other return that might be made from owning the CGT asset)
• The asset is either:
  • A share(s) in a company
  • An option(s) issued by a company to acquire shares in it
  • A convertible note(s) issued by a company that is not a debt interest
• The asset is issued on or after 1 July 2027
• The company issuing the asset is an IBCC company at the time of issue
• It is issued by the company directly to:
  • You (if you are making the capital gain individually); or
  • The trustee of the trust (if the trust is making the capital gain)
• It is held for at least three years (unless it and all other similar interests in the company are issued under a particular scheme, in which case the minimum holding period is 12 months)

There are some additional modifications where attribution managed investment trusts, venture capital limited partnerships (standard or early-stage), Australian venture capital funds of funds, or employee share trusts are involved.

IBCC Explainer – IBCC Companies

A company is an IBCC at a particular time if, at that time:

• The company is an Australian resident company
• The company has been incorporated for less than 15 years
• Any company the company is an affiliate of has been incorporated for less than 15 years
• The company is unlisted
• The company has aggregated turnover not exceeding $50 million for the company’s most recent prior income year
• At least 50% of the people engaged by the company to perform services perform those services primarily in Australia
• At least 50% of the company’s assets by value are situated in Australia
• The company meets the innovative company test (detailed below)
• The company meets the predominant activity test (detailed below)
• The company is registered as an IBCC company under Section 115-165

IBCC Explainer – Innovative Company Test

The innovative company test looks to the same five principles of the ESIC innovation test, namely:

• Genuine focus on developing an innovation
• High growth potential
• Business scalability
• Broad potential market
• Competitive advantage

IBCC Explainer – Predominant Activity Test

The predominant activity test requires all of the following to be satisfied:

• The company is engaged in one or more activities (the innovation activities) that relate to the development or commercialisation of the innovation used as the basis for the innovative company test
• At least one of the activities is not an ineligible activity (property development, land ownership, banking, provision of capital, leasing, factoring, securitisation, insurance, construction, investing to derive interest / rent / dividends / royalties / lease payments, developing technology in relation to gambling / tobacco / vaping products)
• The company must pass the 75% test, which requires satisfaction of two of the following three conditions:
  • More than 75% of the assets of the company and its controlled entities are used for one or more of the innovation activities
  • More than 75% of the people who are employees of either the company and/or its controlled entities are engaged primarily in one or more of the innovation activities
  • More than 75% of the total income of the company and its controlled entities must come from one or more of the innovation activities
• The company does not intend to cease carrying on all of the innovation activities within 5 years of registration as an IBCC company, and a reasonable person in the company’s position would not expect the company to so cease engaging in such an activity within that period

Shares in companies who cease meeting the predominant activity test or cease registration as an IBCC company will be considered ‘disqualified assets’ for the purposes of determining whether they are IBCC assets.

IBCC Explainer – IBCC Registration

The IBCC regime has a specific registration regime which appears to be more strict than the ESIC regime.

In order to maintain an IBCC registration, an IBCC company will need to prepare a written annual report in a prescribed form. Failure to give this report will result in automatic suspension from registration as an IBCC company. Protracted suspension can also result in cancellation of a registration. The requirements of the annual report are not yet known as at the date of writing.

Conversely, ESIC’s don’t need to be registered anywhere. Companies can self-assess into the ESIC regime if they believe they meet the requirements, or they can obtain confirmation of ESIC status from the ATO via a private ruling if certainty is required. ESIC’s are required to lodge an annual report by 31 July each year, but failure to lodge such a report does not result in automatic suspension of a companies’ ESIC status.

Comparison

The below table provides a high-level comparison between the two regimes.

Closing

So all in all, the ESIC regime is much more attractive in terms of benefits, but the proposed IBCC regime has potential application to a much wider range of companies. It’s an incredibly interesting space to watch for any company that has carried on any kind of research and development activity, or is looking to raise funds to commercialise an innovation.

If you are interested in how your company may be able to benefit from either the ESIC regime or the proposed IBCC regime, please don't hesitate to contact your Hall Chadwick advisor, who can put you in touch with our resident experts.