Private ruling: Early stage innovation company
Date of advice: 7 February 2019
Published: May 2019
Ruling period: Year ending 30 June 2019
Date scheme commenced: 1 July 2018

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: 1. The Company was incorporated on Date X. Its equity interests are not listed for quotation in the official list of any stock exchange. 2. In the previous income year the Company had total expenses less than $1m and assessable income less than $200,000. 3. The Company is developing a product and information that details its development was provided.

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

Reasons for decision: Summary: 4. The Company was incorporated in Australia on Date X. Its equity interests are not listed for quotation in the official list of any stock exchange. 5. The Company has no subsidiaries and in the previous income years (as applicable) had total expenses less than $1m and assessable income less than $200,000. 6. The Company is developing a product and information that details its development was provided. | Detailed Reasoning - Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 360-A Section 360-40 Section 360-45 | Detailed Reasoning - Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise indicated. | Summary: The Company meets the eligibility requirements of an ESIC under subsection 360-40(1). | Detailed Reasoning - Qualifying Early Stage Innovation Company: 1. 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’: 2. The early stage test requirements are set out in paragraphs 360-40(1)(a) to (d). | Detailed Reasoning - Incorporation or Registration – paragraph 360-40(1)(a): 3. Paragraph 360-40(1)(a) requires the company to be: ● incorporated in Australia within the last three income years (the latest being the current year); or ● 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 ● registered in the Australian Business Register (ABR) within the last three income years (the latest being the current year) 4. 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. 5. 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): 6. Paragraph 360-40(1)(b) requires the company and its 100% subsidiaries (if any) to 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): 7. Paragraph 360-40(1)(c) requires the company and its 100% subsidiaries (if any) to have 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): 8. Paragraph 360-40(1)(d) requires the company not be listed on any stock exchange in Australia or a foreign country. | Detailed Reasoning - ‘Innovation tests’: 9. If the company satisfies the early stage test, the company must also satisfy one of two innovation tests: (i) the objective (100 point) test, or (ii) the principles-based test. | Detailed Reasoning - 100 Points test subparagraphs 360-40(1)(e) and 360-45(1): 10. To meet the requirements of subsection 360-40(1)(e) the company must have 100 points at a particular time (the test time) in an income year (the current year). The table in subsection 360-45(1) sets out how points are awarded. | Detailed Reasoning - Item 1 in the table - Research and development: 11. A company will be awarded 75 points if it has at least 50 per cent of its total expenses for the previous income year constituting expenses which are eligible for the tax offset for R&D activities provided under Division 355. | Detailed Reasoning - Item 2 in the table - Accelerating Commercialisation Grant: 12. A company will be awarded 75 points if, at any time, it has received an Accelerating Commercialisation Grant under the Accelerating Commercialisation element of the Commonwealth’s Entrepreneurs’ programme | Detailed Reasoning - Item 3 in the table - Research and development: 13. A company will be awarded 15 points if it has at least 15%, but less than 50%, of the company ' s total expenses for the previous income year which are eligible for the tax offset for research and development activities provided under Division 355. | Detailed Reasoning - Item 4 in the table - Eligible accelerator programme: 14. A company will be awarded 50 points if it is undertaking or has completed an eligible accelerator programme. ● 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 | Detailed Reasoning - Item 5 in the table - Third party prior investment: 15. A company will be awarded 50 points under item 5 of the table in subsection 360-45(1) where: ● a total of at least $50,000 has been paid for equity interests that are shares in the company; ● the company issued those shares to one or more parties that were not associates of the company immediately before the issue of those shares; ● the parties did acquire those shares primarily to assist another entity become entitled to a tax offset (or a modified CGT treatment) under Subdivision 360-A; and ● the company issued those shares at least one day before the test time | Detailed Reasoning - Item 6 in the table - Intellectual property rights: 16. A company will be awarded 50 points if it has one or more enforceable rights on an innovation: ● a standard patent granted in Australia in the last five years; ● a plant breeder's right that has been granted in Australia in the last five years; or ● an equivalent intellectual property right granted in another country | Detailed Reasoning - Item 7 in the table - Intellectual property rights: 17. A company will be awarded 25 points if it has ● one or more enforceable rights on an innovation through an innovation patent or design right or an equivalent intellectual property right granted in another country ● Where the property right relates to an innovation patent or foreign equivalent, the right must have been granted and certified within the last 5 years. ● Where the property right relates to a design or foreign equivalent, it must have been registered within the last 5 years. | Detailed Reasoning - Item 8 in the table - Collaborative agreement: 18. 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 - Test time: 19. 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. | Detailed Reasoning - Current year: 20. 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 to 2019, and the income year before the current year will be the year ending 30 June 2018 (the 2018 income year). | Detailed Reasoning - Incorporation or Registration – paragraph 360-40(1)(a): 21. As the company was incorporated within the last 3 income years, subparagraph 360-40(1)(a)(i) is satisfied. | Detailed Reasoning - Total expenses – paragraph 360-40(1)(b): 22. As the company had expenses less than $1 million in the prior income year, the requirement in paragraph 360-40(1)(b) is satisfied. | Detailed Reasoning - Assessable income – paragraph 360-40(1)(c): 23. As the company’s assessable income for the prior income year is less than $200,000 the requirement in paragraphs 360-40(1)(c) is satisfied. | Detailed Reasoning - No stock exchange listing – paragraph 360-40(1)(d): 24. As the company is privately owned and is not listed on any stock exchange in Australia or a foreign country, the requirement in paragraph 360-40(1)(d) is satisfied. | Detailed Reasoning - Conclusion on early stage test: 25. 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 Points test subparagraphs 360-40(1)(e) and 360-45(1): 26. To meet the requirement in paragraph 360-40(1)(e) the company must have 100 points at a particular time (the test time) in an income year (the current year). 27. In determining whether you have satisfied the 100 point test, you have applied the following items in the table in subsectoin 360-45(1): ● Item 5 - Third party has previously invested at least $50,000 ● Item 6 - Holds certain enforceable intellectual property rights | Detailed Reasoning - Third party prior investment - item 5 in table: 28. The company received more than $50,000 for shares issued to various parties that: ● were not associates (within the meaning of section 318 of the ITAA 1936) of the company immediately before the issue of those shares, ● did not acquire shares to assist another entity to become entitled to a tax offset or modified CGT treatment and ● the shares were issued to various entities at least one day before the test time 29. As the company satisfies all the requirements in item 5, it will be awarded 50 points. | Detailed Reasoning - Intellectual property rights- item 6 in table: 30. As the company was granted an Australian Standard Patent, within the last five years, the company satisfies this requirement and will be awarded 50 points. | Detailed Reasoning - Has the 100 points test been met?: 31. As the company satisfies the requirements in items 5 and 6 in the table in subsection 360-45(1), it will be awarded a total of 100 points. The company will therefore satisfy the 100 points test in subsection 360-40(1)(e). | Detailed Reasoning - Conclusion: 32. The company meets the eligibility criteria of an ESIC under section 360-40 for the period commencing 1 July 2018 until 30 June 2019.