Private ruling: Early stage innovation company
Date of advice: 11 August 2022
Published: November 2022
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the taxpayer meet the Early Stage Tests under subsection 360-40(1)(a) to (d) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The taxpayer was incorporated in Australia. The taxpayer interests are not listed for quotation in the official list of any stock exchange, either in Australia or a foreign country. Company A and its foreign subsidiary operate business in Australia and Country A respectively. Company A incurred total expense of more than 1 million dollar and earned assessable income of more than $XX. The taxpayer issued shares to some investors. The taxpayer acquired XX% of the shareholding in Company A and Company B.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 360-A | Income Tax Assessment Act 1997 section 360-15 | Income Tax Assessment Act 1997 section 360-40 | Income Tax Assessment Act 1997 section 360-45

Reasons for decision: Detailed Reasoning - Qualifying Early Stage Innovation Company: 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': 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 six income years (the latest being the current year), and across the last three of those income years before the current year, 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). 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 - TEST TIME: For the purposes of this ruling, the 'test time' will be upon the issue of qualifying shares on a particular date or dates in the following periods: • After XX XXX 20XX and on or before 30 June 20XX | Detailed Reasoning - Current year: Therefore, for the purposes of subsection 360-40(1) ITAA 1997 , the 'current year' will be the year ending 30 June 20XX (the 20XX income year). For clarity, in relation to particular requirements within subsection 360-40(1), the last 3 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 - Incorporation or Registration - paragraph 360-40(1)(a) ITAA 1997: The taxpayer was incorporated in Australia within the 3 income years outlined above, therefore the requirements of subparagraph 360-40(1)(a)(i) are satisfied. | Detailed Reasoning - Total expenses - paragraph 360-40(1)(b) ITAA 1997: In applying the requirements of paragraph 360-40(1)(b), the taxpayer and any of its 100% subsidiaries must have incurred total expenses of $1 million or less in the 20XX income year, being the income years before the current year. Paragraph 360-40(1)(b) test applies if a company has a 100% subsidiary at the test time but any expenses incurred by the subsidiary before it became a 100% subsidiary are not taken into account for the $1 million threshold. The taxpayer did not incur any expenses in the 20XX income year. Consequently, paragraph 360-40(1)(b) is satisfied. | Detailed Reasoning - Assessable income - paragraph 360-40(1)(c) ITAA 1997: In applying the requirements of paragraph 360-40(1)(c), the taxpayer and any of its 100% subsidiaries must have derived total assessable income of $200,000 or less in the 20XX income year, being the income years before the current years. Paragraph 360-40(1)(c) test applies if a company has a 100% subsidiary at the test time but any income incurred by the subsidiary before it became a 100% subsidiary are not taken into account for the $200,000 threshold. The taxpayer did not earn any assessable income in the 20XX income year. Consequently, paragraph 360-40(1)(c) is satisfied. | Detailed Reasoning - No Stock Exchange listing - paragraph 360-40(1)(d) ITAA 1997: In applying the requirements of paragraph 360-40(1)(d), the taxpayer must not be listed on any Stock Exchange in Australia or a foreign country at the test time. The taxpayer is not listed on any Stock Exchange in Australia or a foreign country at the test time, so paragraph 360-40(1)(d) is satisfied. | Detailed Reasoning - CONCLUSION FOR EARLY STAGE TEST: The taxpayer satisfies the early stage test for the 20XX and 20XX income years, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.