ESIC Schemes and Part IVA

ATO Flags Anti-Avoidance Risk

The ATO has sharpened its stance on Early Stage Innovation Company (ESIC) investments, confirming that some schemes marketed under the ESIC framework may breach Part IVA — the general anti-avoidance rule in the tax law.

This came through in TD 2025/D1, a draft determination released in response to concerns raised in Taxpayer Alert TA 2024/1. Together, these documents send a clear message: if a scheme is designed primarily to generate tax offsets and capital gains exemptions, it’s in the ATO’s sights.

What’s the issue?

The ESIC regime was introduced to encourage investment in high-risk, early-stage startups by offering:

A 20% non-refundable tax offset on qualifying investments
A CGT exemption for shares held for between 12 months and 10 years

But in recent years, the ATO has seen a rise in structured schemes designed to meet the technical requirements of ESIC status — while failing to reflect real innovation or genuine commercial risk.

In other words: artificial eligibility, tax-driven arrangements, and engineered structures that tick the boxes without doing the work.

What TD 2025/D1 says

The draft determination outlines the Commissioner’s view that Part IVA may apply where an ESIC structure has the dominant purpose of obtaining a tax benefit.

Key points:

The determination looks at arrangements similar to those in TA 2024/1, which involve contrived investor entry, exaggerated innovation metrics, and circular ownership.
Where the dominant purpose is to access the ESIC tax concessions, and not to raise genuine risk capital or drive innovation, Part IVA will be considered.
The usual factors in s 177D(2) ITAA 1936 will be weighed — including how the scheme was structured, marketed, and implemented.

The draft ruling will apply retrospectively and prospectively once finalised.

Why this matters for advisers and early-stage investors

The message is clear: compliance with the letter of the ESIC rules isn’t enough. If the underlying arrangement lacks commercial substance or has been built primarily to deliver tax advantages, it’s likely to trigger ATO scrutiny.

This has practical consequences for:

Advisers involved in structuring or certifying ESIC eligibility
Investors seeking offsets and CGT exemptions
Founders and early-stage companies working with capital-raising platforms

What to do now

For practitioners advising startups or investors:

Revisit existing ESIC schemes or investors to determine if any features are likely to be seen as contrived or tax-driven.

Where ESIC eligibility is claimed, ensure there is robust documentation of genuine innovation and commercial activity.

Watch for non-arm’s length transactions, investor churn, or arrangements where the startup’s activities are immaterial or recycled.

Consider advising clients of the Part IVA exposure where there’s no real innovation risk or economic purpose beyond tax benefits.

It’s also worth noting that the Commissioner does not need to prove intent — only that a reasonable conclusion can be drawn about the dominant purpose.

Final observation

The ESIC regime was built to support innovation, not optimisation. TD 2025/D1 is a warning shot, and one that will likely reshape how aggressive ESIC strategies are marketed and structured.

Advisers working in the startup and VC space should treat this as an opportunity to review past activity and help clients avoid ATO scrutiny before it becomes retrospective action.