Private ruling: Early stage innovation companies and eligible accelerator programs
Date of advice: 25 August 2021
Published: November 2021
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will Company A, obtain 50 points under item 4 of the table in subsection 360-45(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for participating in an eligible accelerator program? | A1: Yes, Company A will obtain 50 points from the date it commenced participating in the program. | Q2: Does Company A meet the early stage test under paragraphs 360-40(1) (a) to (d) of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: Company A was incorporated in Australia on Date X. Its equity interests are not listed for quotation in the official list of any stock exchange. Company A has no subsidiaries and its total expenses in the previous income year, i.e. the year ended 30 June 20XX was less than $1 million. Company A's assessable income for the year ended 30 June 20XX is less than $200,000. Company A has lodged an early stage innovation company report for the year ended 30 June 20XX. Entity A has been offering a number of different programs to participants since 20XX and Company A commenced its participation in one of those programs during the year ended 30 June 20XX. The program that Company A was accepted into: • is cohort based • in which support is provided for a set period; • provides access to mentors and other advisors; and • has a series of modules that must be completed in order to complete the program. Company A issued shares in the year ended 30 June 20XX after it commenced the program.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 360-40 | Income Tax Assessment Act 1997 subsection 360-40(1) | Income Tax Assessment Act 1997 paragraph 360-40(1)(a) | Income Tax Assessment Act 1997 paragraph 360-40(1)(b) | Income Tax Assessment Act 1997 paragraph 360-40(1)(c) | Income Tax Assessment Act 1997 paragraph 360-40(1)(d) | Income Tax Assessment Act 1997 subsection 360-45(1)

Reasons for decision: Summary: Yes, Company A will obtain points under item 4 of the table in subsection 360-45(1) on the date it commenced its participation in the program. | Detailed Reasoning - Eligible Accelerator Program: Under the 100-point innovation test used to determine if a company qualifies as an early stage innovation company (ESIC) in section 360-40, 50 points are available if a company has completed or is undertaking an eligible accelerator program (item 4 of the table in subsection 360-45(1)). The requirements of this test are that, at the test time: a) the company has completed or is undertaking an accelerator program that: i. provides time-limited support for entrepreneurs with start-up businesses; and ii. is provided to entrepreneurs that are selected in an open, independent and competitive manner; and b) the entity providing that program has been providing that, or other accelerator programs for entrepreneurs, for at least 6 months; and c) such programs have been completed by at least one cohort of entrepreneurs. Accelerators are a relatively new type of organisation. Essentially, an accelerator is a type of organisation that assists new ventures by providing accelerator programs. Accelerator programs are designed to help cohorts of new ventures with the venture process which includes defining and building their initial products, identifying promising customer segments and securing resources (both capital and employees). They may be either for-profit or non-profit, but regardless, the programs usually provide a small amount of seed capital and working space. They offer significant networking, educational and mentorship opportunities with both peer ventures and mentors who may be successful entrepreneurs, program graduates, venture capitalists, angel investors, or corporate executives. Accelerator programs are run on a fixed and limited duration, typically running for three to six months. In the initial stages, the structure and content of the program is likely to be common across the cohort, before diversifying to a more customised and unstructured format tailored to the needs of the individual start-ups. It is not sufficient for a program to simply meet the accepted definition of an accelerator program in order for startups that undertake the program to be eligible for 50 points. The program must also be an eligible accelerator program, as per item 4 of the table in subsection 360-45(1). The Explanatory Memorandum (EM) to Tax Laws Amendment (Tax Incentives For Innovation) Bill 2016 provides guidance on what is considered an eligible accelerator program for the purposes of item 4 of the table in subsection 360-45(1) when it states at paragraph 1.95: ...An eligible accelerator programme is a programme that provides time-limited support for start-ups, for which an open, independent and competitive application process is required for entry, provided the entity running that programmehas been operating for at least a six month period and has provided a complete programme of this kind to at least one cohort of entrepreneurs. Accelerator programmes that cannot provide value adding support (mentorship, training, education and networks) to the accepted companies or have had no successful companies coming through the programme are unlikely to be effective accelerator programmes. The EM guidance in conjunction with the law points to five factors that an accelerator program must satisfy to be considered an eligible accelerator program. These are: i. A merit-based screening process - entry into an accelerator program must involve a merit-based screening process, where entry into the program is determined by an open, competitive validation process. Programs that offer entry based predominantly upon payment of a fee would not qualify. ii. The company, not an individual, must complete the program . In some instances it is the founder of a company that is registered to undertake an accelerator program. In order to satisfy the requirements of subsection 360-45(1) the company itself must receive certification upon completion of the program. iii. Time-limited support - the limited duration is the characteristic that most clearly defines accelerator programs. Generally speaking, a program will run for approximately 3 to 6 months. iv. Six month minimum period - the Accelerator must have been providing accelerator programs for a minimum of 6 months at the test time (when the potential ESIC issues shares to the investor). This is not limited to the particular program being considered under the 100-point innovation test, but can include any accelerator program provided by the accelerator. v. Prior completion by a cohort of entrepreneurs - at least one cohort of entrepreneurs must have completed either that particular program, or another program offered by the accelerator. The term 'cohort' refers to a group or batch and is not merely one or two entrepreneurs. | Detailed Reasoning - Application to your circumstances: For the purposes of this ruling the program must satisfy two overarching requirements: 1) it is an accelerator program in accordance with the common definition; and 2) it is an eligible accelerator program in accordance with item 4 of the table in subsection 360-45(1). | Detailed Reasoning - Accelerator Program: Participants in the program receive time-limited support in the form of training, mentoring, education and access to professional service providers and a broad range of networks. In addition, the program methodically leads participants through what it takes to turn their ideas into products and services with the aim of demonstrating the process of translating the participants' innovation into a successful business. These characteristics clearly fit some accepted characteristics of an accelerator program, being to assist cohorts of new ventures to define and build their initial products, and identify promising customer segments. In particular, accelerators have been identified as having five defining, partially interdependent features, being: seed funding; cohort based; co-location; a structured program; and mentoring. | Detailed Reasoning - Seed funding: The does not provide seed funding in exchange for equity in the participating company. However it reserves the right to invest at a later date. | Detailed Reasoning - Cohort-based entry and exit: The program is cohort based, with the cohorts graduating when they complete the program. | Detailed Reasoning - Co-location: Co-location is not available to participants as the support is provided virtually through the use of technology. | Detailed Reasoning - A structured program: The program is of a fixed term and limited-duration. | Detailed Reasoning - Mentoring: Entity A provides mentors with a wide range of experience to participants of the program. In short, it is accepted that the program meets the defining characteristics of what is regarded as an accelerator program. | Detailed Reasoning - Eligible Accelerator Program: Each of the five factors that an accelerator program must satisfy to be considered an eligible accelerator program in accordance with item 4 of the table in subsection 360-45(1) will be examined in turn. | Detailed Reasoning - A merit-based screening process: Entry into the program is decided via an application and interview process. The selection process is highly competitive and open to any applicant. The selection of startups for its program is a merit-based screening process. | Detailed Reasoning - The company, not an individual, must complete the program: The program is offered to both start-up companies and individuals. In this instance it is Company A that is participating in the program. | Detailed Reasoning - Time-limited support: Generally, time-limited support will mean a program lasting between 3 to 6 months. The program is completed within this timeframe. It is an intensive and structured program and falls within the meaning of time-limited support. | Detailed Reasoning - Six month minimum period: Entity A has been running programs since 20XX, and the first program was provided a number of years prior to 1 July 20XX, | Detailed Reasoning - Prior completion by a cohort of entrepreneurs: The first cohort of a program operated by Entity A completed that program before 1 July 20XX. Entity A meets the requirement that it have at least one cohort of entrepreneurs previously complete one of its accelerator programs. | Detailed Reasoning - Conclusion: The program is an accelerator program according to the common definition. In addition the program meets the features of an eligible accelerator program according to item 4 of the table in subsection 360-45(1). As such Company A qualified for 50 points towards their 100-point innovation test once their participation in the program commenced and were in the process of completing the program. They commenced their participation during the year ended 30 June 20XX and from the date they commenced their participation to 30 June 20XX had access to the 50 points under item 4 of the table in subsection 360-45(1). During this period Company A issued shares to investors so those points can be applied to the 100-point test in respect of those shares. From 1 July 20XX onwards, Company A will continue to have access to these points while they complete the program. Access will then continue when Company A has successfully completed the program. However, should Company A fail to complete the program because they ceased participation before completing the program, they will cease to qualify for the 50 points from the date they leave the program. | Detailed Reasoning - Question 2: Does Company A meet the early stage test under paragraphs 360-40(1) (a) to (d) of the ITAA 1997? | Summary: Yes, Company A satisfied the early stage test for the entire 20XX income year, as each of the requirements within paragraphs 360 40(1)(a) to (d) have been satisfied. | Detailed Reasoning - 'The early stage test': 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): 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 6 income years (the latest being the current year), and across the last 3 of those income years before the current year it and its *100% subsidiaries (if any) 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). 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. For the purposes of this ruling, the 'current year' is the year ended 30 June 20XX. A company that does not meet any of these conditions will not qualify as an ESIC. As Company A was incorporated on Date X, which is within the last 3 income years, subparagraph 360-40(1)(a)(i) is satisfied. | Detailed Reasoning - Total expenses - paragraph 360-40(1)(b): 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. As Company A had expenses of $1 million or less in the year before the current income year (the 20XX income year) paragraph 360-40(1)(b) is satisfied. | Detailed Reasoning - Assessable income - paragraph 360-40(1)(c): 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. As Company A's assessable income in the year before the current income year (the 20XX income year) is $200,000 or less paragraph 360 40(1)(c) is satisfied. | Detailed Reasoning - No stock exchange listing - paragraph 360-40(1)(d): 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. As Company A is privately owned and is not listed on any stock exchange in Australia or a foreign country paragraph 360-40(1)(d) is satisfied.

This ruling applies for the following period: | Reasons for decision: All legislative references are to the ITAA 1997 unless otherwise indicated.