Private ruling: Early stage innovation company qualification
Date of advice: 25 September 2019
Published: November 2019
Ruling period: Year ended 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Will ABC Pty Ltd (the Company) obtain 50 points under item 5 of the table in subsection 360-45(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if they received an investment of at least $50,000 from an investor for shares in the Company? | A1: Yes | Q2: By having the right to use the intellectual property from XYZ Pty Ltd as a licensee via the Licence Agreement, will the Company obtain 50 points under item 6 of the table in subsection 360-45(1) of the ITAA 1997? | A2: Yes | Q3: If the answers to Questions 1 and 2 are yes, does the Company meet the criteria of an Early Stage Innovation Company (ESIC) under subsection 360-40(1) of the ITAA 1997 in the year ended 30 June 2019? | A3: Yes

Relevant facts and circumstances: The Company was incorporated in Australia in 2017. Its equity interests are not listed for quotation in the official list of any stock exchange. The Company has no subsidiaries. The Company's expenses for the year ended 30 June 2019 totalled $x. The Company had $x assessable income in the 2019 income tax year. The Company received an investment of $x from an unrelated third party in June 2019 in return for shares. Under the Licence Agreement, the Company was assigned the Australia Patent xxxxxx as a Licensee. The Licensor is XYZ Pty Ltd. IP Australia originally granted the Patent to XYZ Pty Ltd in xxxx year. IP Australia determined the Patent to be a standard patent.

Relevant legislative provisions: Income Tax Assessment Act 1936 | Income Tax Assessment Act 1936 , subsection 318(2) | Income Tax Assessment Act 1997 | Income Tax Assessment Act 1997 , Division 360 | Income Tax Assessment Act 1997 , subdivision 360-A | 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 , subparagraph 360-40(1)(a)(i) | 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 , section 360-45 | Income Tax Assessment Act 1997 , subsection 360-45(1)

Reasons for decision: Summary: The Company obtained 50 points under item 5 of the table in subsection 360-45(1) when they received an investment of at least $50,000 from an investor for shares in the Company. | Detailed Reasoning - Detailed reasoning: 50 points are obtained by a company under item 5 of the table in subsection 360-45(1) where: i. a total of at least $50,000 has been paid for equity interests that are shares in the company; ii. the company issued those shares to one or more parties that were not associates of the company immediately before the issue of those shares; iii. the acquiring entity did not acquire those shares primarily to assist another entity to become entitled to a tax offset (or a modified CGT treatment) under Subdivision 360-A; and iv. the company issued those shares at least one day before the test time. At least $50,000 has been paid for equity interests that are shares in the company An investor paid at least $50,000 for shares in the Company in June 2019. Parties that were not associates of the company immediately before the issue of those shares An associate of a company is defined under subsection 318(2) of the Income Tax Assessment Act 1936 . Examples of entities that would be an associate of a company include: · a partner of the company or a partnership in which the company is a partner · a trustee of a trust estate under which the company or associate benefits · another entity (including a person) that, acting alone or with another entity or entities, sufficiently influences the company · an entity (including a person) that, either alone or together with associates, holds a majority voting interest in the company · a second company that is sufficiently influenced by the company or the company's associates · a second company in which a majority voting interest is held by the company or the company's associates The investor is an unrelated third party who acquired shares in the Company. Therefore, when the investor acquired their shares they were not an associate immediately prior to the shares being issued. Acquire those shares primarily to assist another entity become entitled The investor acquired shares to provide the capital necessary to assist the Company with its development and commercialisation activities. It could not be concluded that in acquiring shares in the Company that the investor's primary purpose in acquiring shares is to assist other investors gaining access to the offset. The company issued those shares at least one day before the test time The Company issued the shares to the investor in the 2019 income year. The shares have been issued at least one day before the test time. Conclusion Item 5 The Company obtained 50 points under item 5 of the table in subsection 360-45(1) when the investor paid the Company at least $50,000 for their shares. | Summary: The Company obtained 50 points under item 6 of the table in subsection 360-45(1) from being a Licensee to the Licence Agreement with XYZ Pty Ltd being the Licensor. | Detailed Reasoning - Detailed reasoning: 50 points are obtained by a company under item 6 of the table in subsection 360-45(1) where: the company has enforceable rights (including a licence) on an innovation through either: i. a standard patent granted in Australia in the last five years; ii. a plant breeder's right that has been granted in Australia in the last five years; or iii. an equivalent intellectual property right granted in another country. In the Licence Agreement between the Company and XYZ Pty Ltd, the Company was named as the Licensee for Australia Patent xxxxxx with the Licensor being XYZ Pty Ltd. IP Australia granted the Australian standard patent in xxxx year. Therefore, for the year ended 30 June 2019, the Company obtained 50 points from being a Licensee to the Licence Agreement. | Summary: 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: 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). 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 - 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 income year ending 30 June 2019. Current year For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 2019 (the 2019 income year). For clarity, in relation to particular requirements within subsection 360-40(1), the last three income years will include the years ending 30 June 2017, 30 June 2018 and 30 June 2019, and the income year before the current year will be the year ending 30 June 2018 (the 2018 income year). | Detailed Reasoning - Early stage test: Incorporation or Registration - paragraph 360-40(1)(a) As the Company was incorporated in 2017, which is within the last 3 income years, subparagraph 360-40(1)(a)(i) is satisfied. Total expenses - paragraph 360-40(1)(b) As the Company 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) As the Company had assessable income for the prior income year less than $200,000, 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 2019 income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied. | Detailed Reasoning - 100-point test: As concluded in our reasons for Question 1, the Company can apply the 50 points under item 5 of the table in subsection 360-45(1) in the 2019 income year. As concluded in our reasons for Question 2, the Company can apply the 50 points under item 6 of the table in subsection 360-45(1) in the 2019 income year. The Company therefore has at least 100 points under section 360-45 in the 2019 income year. Conclusion The Company meets the eligibility criteria of an ESIC under section 360-40 in the year ended 30 June 2019.