Private ruling: Early Stage Innovation Company qualification
Published: January 2020
Ruling period: Year ending 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: Does Company A ('the Company') meet the criteria of an Early Stage Innovation Company (ESIC)under subsection 360-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes, provided that the Company and its 100% subsidiaries have total expenses for the last three income years, with the most recent year being the 20ZZ income year, of $1 million or less at each relevant test time.


Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 360-A | Income Tax Assessment Act 1997 section 360-40 | Income Tax Assessment Act 1997 section 360-45

Reasons for decision: Summary: All legislative references are to the ITAA 1997 unless otherwise indicated. | Summary: The Company will meet the eligibility requirements of an ESIC under subsection 360-40(1), provided that the Company and its 100% subsidiaries have total expenses for the last three income years, with the most recent year being the 20ZZ income year, of $1 million or less at each relevant test time. | Detailed Reasoning - Qualifying Early Stage Innovation Company: 1. Subsection 360-40(1) outlines the criteria required for a company to qualify as an Early Stage Innovation Company (ESIC) at a particular time in an income year. This time is referred to as the test time. The criteria are based on a series of tests to identify if the company is at an early stage of its development and it is developing new or significantly improved innovations to generate an economic return. | Detailed Reasoning - 'The early stage test': 2. The early stage test requirements are outlined in detail within paragraphs 360-40(1)(a) to (d). | Detailed Reasoning - Incorporation or Registration - paragraph 360-40(1)(a): 3. To meet the requirement in paragraph 360-40(1)(a), at a particular time (the test time) in an income year (the current year) the company must have been either: (i) incorporated in Australia within the last three income years (the latest being the current year); or (ii) incorporated in Australia within the last six income years (the latest being the current year), and across the last three of those income years the company and its 100% subsidiaries incurred total expenses of $1 million or less; or (iii) registered in the Australian Business Register (ABR) within the last three income years (the latest being the current year). 4. The term 'current year' is defined in subsection 360-40(1) with reference to the 'test time'; the 'current year' being the income year in which the company issues shares to the investor. 5. A company that does not meet any of these conditions will not qualify as an ESIC. | Detailed Reasoning - Total expenses - paragraph 360-40(1)(b): 6. To meet the requirement in paragraph 360-40(1)(b), the company and its 100% subsidiaries must have incurred total expenses of $1 million or less in the income year before the current year. | Detailed Reasoning - Assessable income - paragraph 360-40(1)(c): 7. To meet the requirement in paragraph 360-40(1)(c), the company and its 100% subsidiaries must have derived total assessable income of $200,000 or less in the income year before the current year. | Detailed Reasoning - No stock exchange listing - paragraph 360-40(1)(d): 8. To meet the requirement in paragraph 360-40(1)(d), the company must not be listed on any stock exchange in Australia or a foreign country. | Detailed Reasoning - Innovation tests: 9. If the company satisfies the early stage test, the company must also satisfy one of two innovation tests: the objective (100 point) test or the principles-based test. | Detailed Reasoning - '100 point test' - paragraph 360-40(1)(e) and section 360-45: 10. To satisfy the 100 point test the company must obtain at least 100 points by meeting the innovation criteria in the table within section 360-45. The criteria are tested at a time immediately after the relevant shares are issued. If a company satisfies this test it does not need to satisfy the principles-based test. ' Principles-based test' - subparagraphs 360-40(1)(e)(i) to (iv) 11. To satisfy the principles-based test, the company must meet five requirements in paragraph 360-40(1)(e). This is tested at a time immediately after the relevant new shares are issued to the investor. 12. The company can demonstrate that it meets each requirement through existing documentation such as a business plan, commercialisation strategy, competition analysis or other company documents. The company must be able to show that tangible steps have been or will be taken in relation to each of the requirements. 13. The five requirements of the principles-based test, as outlined in paragraph 360-40(1)(e) are: i. the company must be genuinely focused on developing one or more new or significantly improved innovations for commercialisation ii. the business relating to that innovation must have a high growth potential iii. the company must demonstrate that it has the potential to be able to successfully scale up the business relating to the innovation iv. the company must demonstrate that it has the potential to be able to address a broader than local market, including global markets, through that business, and v. the company must demonstrate that it has the potential to be able to have competitive advantages for that business. | Detailed Reasoning - Application to your circumstances: Test time 1. For the purposes of this ruling, the test time for determining if the Company is a qualifying ESIC will be a particular date during the income year ending 30 June 20ZZ. Current year 2. For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 20ZZ (the 20ZZ income year). For clarity, in relation to particular requirements within subsection 360-40(1), the last three income years will include the years ending 30 June 20ZZ, 20YY and 20XX, and the income year before the current year will be the year ending 30 June 20YY (the 20YY income year). | Detailed Reasoning - Early stage test: Incorporation or Registration - paragraph 360-40(1)(a) 3. As the Company was incorporated on Date X, which is not within the last 3 income years, the Company will need to satisfy subparagraph 360-40(1)(a)(ii). 4. Paragraph 360-40(1)(a)(ii) will be met where the total expenses of the Company and its 100% subsidiaries over the last 3 income years, as at the test time, are $1 million or less. Total expenses - paragraph 360-40(1)(b) 5. As the Company had expenses of $1 million or less in the prior income year, paragraph 360-40(1)(b) is satisfied. Assessable income - paragraph 360-40(1)(c) 6. As the Company's assessable income for the prior income year is $200,000 or less, paragraph 360-40(1)(c) is satisfied. No stock exchange listing - paragraph 360-40(1)(d) 7. As the Company is privately owned and is not listed on any stock exchange in Australia or a foreign country, subparagraph 360-40(1)(d) is satisfied. Conclusion on early stage test 8. The Company will satisfy the early stage test for the 20ZZ income year, provided the requirement in 360-40(1)(a)(ii) is also satisfied at each relevant test time. | Detailed Reasoning - Principles based test: 9. In an earlier ruling we concluded that the Company passed the principles based test in respect of the innovation that they are developing. While the innovation is still being developed they will continue to satisfy the principle based test. 10. The Company provided an outline of the progress made since the ruling for the year ended 30 June 20YY issued and an estimate of how long it will take to fully develop the innovation. The Commissioner is satisfied that the Company is still developing the innovation. 11. Therefore, provided the requirement in 360-40(1)(a)(ii) is satisfied at each relevant test time, the Company meets the eligibility criteria of an ESIC under section 360-40 for the period commencing 1 July 20YY until the earlier of 30 June 20ZZ or the date when the innovation has been fully developed and is ready for use, whichever occurs earlier.

Relevant facts and circumstances: The Company was incorporated in Australia on Date X. Its equity interests are not listed for quotation in the official list of any stock exchange. | The Company has never had any subsidiaries and has expenses of less than $1 million and total assessable income of less than $200,000 for the 20YY income year. | The Company is developing a platform similar to other various platforms. It will be a portal that will use niche social networking to create a centralised service platform for the X industry. | The platform the company is developing will involve a number of innovations. | Since a previous ruling issued the Company has continued to develop their innovation and to commercialise the product.