Private ruling: Eligible accelerator program
Date of advice: 25 June 2018
Published: September 2018
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Q1: Does the Program delivered by the Company meet the requirements of an eligible accelerator program for the purposes of item 4 of the table in subsection 360-45(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: 1. The Company has been operating for a number of years. 2. The Company helps start, grow, scale and connect companies within their industry. 3. The Company has provided the Program since 201X. 4. The Company offers the Program to start-up companies within their industry. Entry into the Program is decided by the result of the applicant’s participation in a one to two day competitive boot camp. Over 100 applications are received and around 10 are selected to participate in the Program, based on merit from their performance at the boot camp. 5. The Program is an intensive structured three month program tailored to those in their industry, followed by an optional two months of support for execution and growth. 6. The topics covered throughout the Program include customer discovery, growth, product development, sales, partnerships, international markets and investment. Each topic is facilitated by an expert in the field. 7. The Company has provided details of the mentors of the current Program. 8. The Program culminates in a ‘Demonstration Day’, where companies pitch to a panel of judges and an audience of partners, customers, investors and supporters. 9. As part of the Program, a start-up company will receive pre-seed investment in exchange for granting equity interest in their company to the Company. 10. The Company also provides a workspace for participants. 11. Since its inception in 201X the Program has been run twice (being an annual program) with nine companies completing the Program in 201X and 10 companies participating in 201Y.

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. The Program meets the requirements of an eligible accelerator program for the purposes of item 4 of the table in subsection 360-45(1). | Detailed Reasoning - Eligible Accelerator Program: 1. 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. 2. Accelerators are a relatively new type of organisation. Essentially, an accelerator is a type of organisation that assists new ventures by providing accelerator programs. 3. 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). 4. Accelerator programs are of fixed term 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. 5. It is not sufficient for a program to simply meet the accepted definition of an accelerator program in order for start-ups 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). 6. 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 programme has 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. 7. 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 - To qualify as an eligible accelerator program, 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: 8. For the purposes of this ruling the Company’s program must satisfy two overarching requirements: 1) it is an accelerator program in accordance with the accepted 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: 9. Accelerators are organisations that offer a range of support services and funding opportunities for start-ups. 10. According to the Program Agreement the Company, through the Program, aims to foster the growth of emerging companies within their industry by providing assistance, work space, resources, industry know-how and connections to early-stage companies with unproven technologies, business models and/or markets. 11. The Company’s program meets the above description of an accelerator program as it: a) assists cohorts of early-stage companies in their industry to build and develop their initial product or technology; b) provides participants with guidance and education on topics such as customer discovery, growth, product development, sales, partnerships, international markets and investment; c) assists companies with securing resources and offers seed capital (via the Company’s associated venture fund); d) offers a work space; e) offers significant networking, educational and mentorship opportunities with both peer venturers and mentors; and f) runs for a fixed term. 12. It is accepted that the Company’s program meets all of the major defining characteristics of what is regarded as an accelerator program. | Detailed Reasoning - Eligible Accelerator Program: 13. 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. Merit-based screening process 14. The Company receives, on average, 50 applicants annually; of these approximately 10 companies are selected to participate in the Program each year. This selection process is not based on a payment of a fee. Rather, entry into the Program is a merit-based screening process that consists of participation in a competitive boot camp and interview selection process. The company, not an individual, must complete the program 15. Only start-up businesses which are companies are eligible to participate in the Program. 16. All of the companies applying to participate in the Program are independent of the Company. 17. The companies who participate receive certification upon completion of the Program. 18. The agreement entered into is between the Company and the participating company. As part of the agreement the participating company must issue shares to the Company. 19. It is accepted that companies undertake and complete the Company’s program. Time-limited support 20. Generally, time-limited support will mean a program lasting between 3 to 6 months. The Company’s accelerator program lasts three months and can be optionally extended for up to a further two months with limited support. 21. As per their website the Company’s current program commenced in April 201Y. There is a Demo day in July 201Y and the Program concludes in September 201Y. 22. The Company’s program meets the characteristic of providing time-limited intensive support for entrepreneurs with start-up businesses. Six month minimum period 23. The Company has offered this program for two years and therefore meets the requirement of having provided the accelerator program for a minimum period of six months. Prior completion by a cohort of entrepreneurs 24. The Company has run the program for two years. 25. There have been nine cohorts to have completed the program, and a further 10 cohorts will complete the program in 201Y. 26. The Company meets the requirement that it have at least one cohort of entrepreneurs previously complete one of its accelerator programs. | Detailed Reasoning - Conclusion: 27. The Company’s program is an accelerator program according to the accepted 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).