Private ruling: Early stage innovation company status
Date of advice: 19 December 2019
Published: February 2020
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does Company A 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: 1. Company A was incorporated in Australia on (and registered in the Australian Business Register from), Date X. Its equity interests are not listed for quotation in the official list of any stock exchange. 2. Company A has no subsidiaries and in the year ended 30 June 20XX it had total expenses of $ and assessable income of $Y. 3. Company A has received three previous rulings in respect of whether it is an ESIC. These were a ruling for the year ended 30 June 20XX (authorisation number 1051230056720), 30 June 20XX (authorisation number 1051283603180) and 30 June 20XX (authorisation number 1051431291587). 4. Information in documents in respect of the innovation being developed by Company A provided in respect of all four ruling applications have been used in applying the relevant tests to their circumstances.

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

Reasons for decision: Summary: All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. Company A meets the eligibility requirements of, an ESIC under, subsection 360-40(1). | Detailed Reasoning - Qualifying Early Stage Innovation Company: 5. 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': 6. 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): 7. 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). 8. 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. 9. 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): 10. 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): 11. 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): 12. 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: 13. 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 - 'Principles-based test' - subparagraphs 360-40(1)(e)(i) to (iv): 14. 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. 15. 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. 16. 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 17. For the purposes of this ruling, the test time for determining if Company A is a qualifying ESIC will be a particular date during the income year ending 30 June 20XX. Current year 18. For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 20XX (the 20XX income year). or clarity, in relation to particular requirements within subsection 360-40(1), the last three income years will include the years ending 30 June 20XX, 20XX and 20XX, and the income year before the current year will be the year ending 30 June 20XX (the 20XX income year). | Detailed Reasoning - Early stage test: Incorporation or Registration - paragraph 360-40(1)(a) 19. As Company A was incorporated on Date X, which is within the last 6 income years, subparagraph 360-40(1)(a)(ii) must be satisfied. 20. This subparagraph requires that in the last three income years (including the 20XX year) total expenditure must be $1 million or less. 21. For the income years ended 30 June 20XX and 20XX Company A's expenditure totalled $Z. 22. For their expenditure to be over a $1 million at some point in the year ending 30 June 20XX their total expenditure for that year will have to exceed $S. 23. From the date Company A's total expenditure for the year ending 30 June 2020 eventually exceeds $S (if it exceeds this amount) then they will no longer satisfy the conditions of this paragraph. Total expenses - paragraph 360-40(1)(b) 24. As Company A had expenses less than $1 million in the prior income year paragraph 360-40(1)(b) is satisfied. Assessable income - paragraph 360-40(1)(c) 25. As Company A's assessable income for the prior income year is less than $200,000 paragraph 360-40(1)(c) is satisfied. No stock exchange listing - paragraph 360-40(1)(d) 26. 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. Conclusion on early stage test 27. Unless Company A's total expenditure for the year ending 30 June 20XX exceeds $S, it will satisfy the early stage test for the entire 2020 income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied. 28. Once Company A's total expenditure for the ending 30 June 20XX ending exceeds $S it will cease to meet the requirements in paragraph 360-40(1)(a) and the early stage test will no longer be satisfied.. | Detailed Reasoning - Principles based test: 29. In the earlier rulings Issued to Company A we concluded that they passed the principles-based test in respect of their innovation. 30. While Company A remains genuinely focused on developing their innovation for commercialisation and that innovation can still be seen as being either new or significantly improved when examining the market they will continue to satisfy the principle-bases test. 31. The update provided by Company A demonstrates that they remain genuinely focused on developing their innovation for commercialisation but the competition date has changed. 32. In addition, no competitor in Company A's market has developed anything that would cause their innovation to no longer be new or significantly improved Conclusion on principles test 33. Company satisfies the principles based test as it satisfies the requirements within subparagraphs 360-40(1)(e)(i)to (v) for the period commencing 1 July 20XX until 30 June 20XX or the date when the innovation has been fully developed and is ready for sale, whichever occurs earlier. Conclusion 34. Company A meets the eligibility criteria of an ESIC under section 360-40 for the period commencing 1 July 20XX until the earlier of: · 30 June 20XX; · the date when the innovation has been fully developed and are ready for use; or; · the date total expenditure for the year ended 30 June 20XX exceeds $S; whichever occurs earlier.