Private ruling: Early stage innovation company qualification
Date of advice: 8 February 2023
Published: 27 March 2023
Ruling period: XX Month 20XX to XX Month 20XX
Date scheme commenced: XX Month 20XX

Ruling: Q1: Does 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

Relevant facts and circumstances: The Company was incorporated in Australia on XX Month 20XX. Its equity interests are not listed for quotation in the official list of any stock exchange. The company was registered on the Australian Business Register on XX Month 20XX. The Company has no wholly owned subsidiaries and in the Previous Income Year had total expenses of $X. The total of these expenses qualifying as R&D expenditure was $Y. In the Previous Income Year, the company had no assessable income. The company undertook an accelerator program which provided time limited support in an open, competitive manner, with the program in place for 6 months or more. The company began this program on XX Month 20XX and completed this program on XX Month 20XX with the program provider. The company has confirmed the program provider has provided accelerator programs for entrepreneurs for at least 6 months. These programs have been completed by at least one cohort of entrepreneurs.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 360-40 | Income Tax Assessment Act 1997 section 360-45 | Corporations Act 2001 section 9

Reasons for decision: Summary: All legislative references are to the ITAA 1997 unless otherwise indicated. The Company meets the eligibility requirements of an ESIC under subsection 360-40(1). | Detailed Reasoning - Qualifying Early Stage Innovation Company: Subsection 360-40(1) outlines the criteria required for a company to qualify as an 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': 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: (a) incorporated in Australia within the last three income years (the latest being the current year); or (b) incorporated in Australia within the last six income years (the latest being the current year), and across the last three of those income years before the current year it and its *100% subsidiaries (if any) incurred total expenses of $1 million or less; or (c) 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. 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): 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): 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): 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: 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: 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. | Detailed Reasoning - Research and development claims above a certain threshold (item 1): A company will be awarded 75 points if: At least 50% of the company's total expenses for the previous income year is expenditure that the company can notionally deduct for that income year under section 355-205 (about R & D expenditure) | Detailed Reasoning - Received an Accelerating Commercialisation Grant (item 2): A company will be awarded 75 points ifthey have received an Accelerating Commercialisation Grant under the program administered by the Commonwealth known as the Entrepreneurs' Programme. | Detailed Reasoning - Research and development claims above a certain threshold (item 3): A company will be awarded 50 points if at least 15%, but less than 50%, of the company's total expenses for the previous income year is expenditure that the company can notionally deduct for that income year under section 355-205 (about R & D expenditure). | Detailed Reasoning - Completed or undertaking eligible accelerator programme (item 4): A company will be awarded 50 points under item 4 of the table in subsection 360-45(1) if: (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. | Detailed Reasoning - Third party has invested at least $50,000 (item 5): A company will be awarded 50 points under item 5 of the table in subsection 360-45(1) where: (d) a total of at least $50,000 has been paid for equity interests that are shares in the company; and (e) the company issued those shares to one or more entities that: (i) were not associates of the company immediately before the issue of those shares; and (ii) did not acquire those shares primarily to assist another entity become entitled to a tax offset (or a modified CGT treatment) under this Subdivision; and (f) the company issued those shares at least one day before the test time | Detailed Reasoning - Holds certain enforceable intellectual property rights (item 6): A company will be awarded 50 points under item 6 of the table in subsection 360-45(1) if it has one or more enforceable rights on an innovation as: (i) the patentee, or a licensee, of a standard patent; or (ii) the owner, or a licensee, of a plant breeder's right granted in Australia within the last 5 years (ending at the test time); or (b) the company has equivalent rights under a foreign law. | Detailed Reasoning - Holds certain enforceable intellectual property rights (item 7): A company will be awarded 25 points under item 7 of the table in subsection 360-45(1) if Unless item 6 applies to the company at the test time: (a) the company has rights (including equitable rights) under a Commonwealth law as: (i) the patentee, or a licensee, of an innovation patent granted and certified in Australia; or (ii) the owner, or a licensee, of a registered design registered in Australia; (iii) within the last 5 years (ending at the test time); or (b) the company has equivalent rights under a foreign law. | Detailed Reasoning - Collaborative agreement with research organisation or university to commercialise an innovation (item 8): A company will be awarded 25 points if it has a written agreement to co-develop and commercialise an innovation with either: • an institution or body listed in Schedule 1 to the Higher Education Funding Act 1988 ; or • an entity registered under section 29A of the Industry Research and Development Act 1986 . | Detailed Reasoning - Foreign Company test - paragraph 360-40(1)(f): At the test time, the company must not be a foreign company within the meaning of the Corporations Act 2001. The dictionary in section 9 of the Corporations Act 2001 defines a foreign company to mean: (a) a body corporate that is incorporated in an external Territory, or outside Australia and the external Territories, and is not: (i) a corporation sole; or (ii) an exempt public authority; or (b) an unincorporated body that: (i) is formed in an external Territory or outside Australia and the external Territories; and (ii) under the law of its place of formation, may sue or be sued, or may hold property in the name of its secretary or of an officer of the body duly appointed for that purpose; and (iii) does not have its head office or principal place of business in Australia. | Detailed Reasoning - Application to your circumstances: Test time 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 ruling period. Current year For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 20XX. The income year before the current year will be the year ending 30 June 20XX. | Detailed Reasoning - Early stage test: Incorporation or Registration - paragraph 360-40(1)(a) As the Company was incorporated within the last three income years, paragraph 360-40(1)(a)(i) is satisfied. Total expenses - paragraph 360-40(1)(b) 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) 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) As the Company is privately owned and is not listed on any stock exchange in Australia or a foreign country, paragraph 360-40(1)(d) is satisfied. Conclusion on early stage test The Company will satisfy 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 - 100 point test - subparagraphs 360-40(1)(e) and 360-45(1): 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 the Company satisfies this test it does not need to satisfy the principles based test. The Company is seeking confirmation that it meets the 100 point test by relying on the following items from Table 1, subparagraph 360-45(1): | Detailed Reasoning - Innovation criteria: 1 75 points At least 50% of the company's total expenses for the previous income year is expenditure that the company can notionally deduct for that income year under section 355-205 (about R & D expenditure) 4 50 points 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. Item 1: Table in section 360 -45(1) The Company has advised that at least 50% of their total expenses for the previous income year is R&D expenditure that they can notionally deduct for that income year under section 355-205. The Company can apply 75 points as it satisfies the innovation criteria listed under item 1 of the table in section 360-40(1). Item 4: Table in section 360-45(1) The Company has advised that it commenced an accelerator program which was completed. They have provided a letter from the director of the program provider that confirms the Company was selected for and completed time limited support for entrepreneurs via the program provider. This was a competitive selection process. The Company has confirmed that the program provider has been providing the program, or other accelerator programs for entrepreneurs for at least 6 months; and such programs have been completed by at least one cohort of entrepreneurs. The Company can apply 50 points as it satisfies the innovation criteria under item 4 of the table in section 360-45(1). Conclusion The Company satisfies the 100 point test as it meets the requirements of items 1 and 4 of the table in subsection 360-45(1). | Detailed Reasoning - Foreign Company Test: As the Company was incorporated in Australia, it is not a Foreign Company and paragraph 360-40(1)(f) is satisfied. Conclusion The Company meets the eligibility criteria of an ESIC under section 360-40 for the ruling period.