Under the scheme, an investment opportunity in a start-up company is promoted to individuals by the scheme’s operators. The operators assure the interested individuals the start-up qualifies as an Early stage innovation company (ESIC) and they can claim the early stage investor tax offset (tax offset).

The operators lend the individual money to buy shares in the start-up and then funds are moved around between the start-up, the individual investor, and the operator to access the tax offset.

ATO is concerned these start-ups don’t qualify as ESICs.

These type of circular financing arrangements where participants inappropriately claim a tax offset and interest deductions can result in honest people being caught in a tax avoidance scheme. Participants and promoters of these types of arrangement may face serious penalties.

If an offer seems too good to be true, get advice from a registered tax professional (or an adviser who has no connection to the arrangement) before entering or committing to anything.

The ATO may examine the activities of a company if they have concerns it doesn’t qualify as an ESIC, particularly if it has participated in the scheme or has carried on minimal or no activity.

ATO take tax avoidance schemes very seriously and is working with the government to strengthen the laws that penalise scheme promoters.

For more information on identifying and reporting schemes visit tax schemes.