Private ruling: Eligible accelerator program
Date of advice: 27 June 2022
Published: October 2022
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the Program delivered by Entity A 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. As part of its operations the Entity offers a suite of programs to support innovators and their start-up companies. One of these programs is the Program. 2. The entity has been offering the Program since 20XX and details of the Program including selection process, structure and curriculum was provided with the ruling application.

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: Detailed Reasoning - Question 1: Does the Program delivered by Entity A meet the requirements of an eligible accelerator program for the purposes of item 4 of the table in subsection 360-45(1)? | Summary: The Program meets the requirements set down in item 4 of the table in subsection 360-45(1) (Item 4). | Detailed Reasoning - Detailed reasoning: 3. In determining whether a company is an early stage innovation company (ESIC) under paragraph 360-40(1), the company must have at least 100 points under section 360-45 or meets the requirements set down in subparagraphs 360-40(1)(i) to (v). 4. In respect of the 100 points, 50 points are available under Item 4 if a company has: a) 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. 5. Paragraph 1.95 of the Explanatory Memorandum (EM) to Tax Laws Amendment (Tax Incentives For Innovation) Bill 2016 provides guidance on the above item and refers to accelerator programs that satisfy Item 4 as 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. 6. In these reasons we will use the term eligible accelerator program [1] to describe a program that satisfies Item 4, but it is not sufficient for a program to satisfy the generally accepted meaning of what is an accelerator program. In order for start-ups that undertake the program to be eligible for 50 points, the program must meet the specific requirements listed in Item 4. | Detailed Reasoning - Accelerator program - generally accepted meaning: 7. Accelerator programs have been identified as generally having 5 defining, partially-interdependent features, being: seed funding; cohort based; co-location; a structured program; and mentoring. [2] 8. It is not essential for an entity to precisely meet all five criteria in order to be considered an accelerator. The criteria are intended as a guide only. Consideration will involve a weighing of the factors on a case by case basis. | Detailed Reasoning - Seed funding: 9. Accelerators typically offer start-ups seed funding in exchange for a small proportion of equity. This is generally around 7.5% to10% for a $20,000 to $50,000 cash investment, in addition to further in-kind value worth $20,000 to $50,000. 10. The Entity provides seed funding, but does not take any equity in the entities accepted into the Program. | Detailed Reasoning - Cohort-based entry and exit: 11. Accelerators simultaneously invest in a cohort (batch) of start-ups. Entry is typically limited to 10 or fewer start-ups per cohort. 12. The Program is cohort-based and participants must pass a final assessment to graduate from the program. | Detailed Reasoning - Co-location: 13. It is often a requirement for start-ups to be co-located full-time in the same space. This allows for economies of scale when sharing resources or specialists, and also facilitates peer interaction and learning. 14. Entity A offers participant rent-free access to a dedicated co-working space for the duration of the Program. | Detailed Reasoning - A structured program: 15. 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). 16. 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. Direct contact with the cohort varies, although between two and ten hours per week is the norm. Cohorts of firms commence and graduate the program together, and it is usual to conclude with a final event where the ventures pitch to a large audience of qualified investors. 17. The Program runs for a set period of weeks which gives participants access to a series of workshop and education topics. | Detailed Reasoning - Mentoring: 18. Mentors may be full time business development advisors, successful entrepreneurs, alumni of the program, volunteers, or seed fund investors. Mentors may be local and readily accessible, or remotely located with the ability to access overseas markets and partners. 19. The Program includes mentoring from specialists to help build and improve a participant's idea for commercial success. | Detailed Reasoning - Conclusion - generally accepted meaning of accelerator program: 20. In comparing the Program to the 5 factors in the generally accepted meaning of accelerator program: • seed funding is provided; • the number of cohort members varies each year; • co-location is available to participants for the duration of the Program; • there is a set program length with an assessment and graduation at the end of the Program; and • mentoring is provided. 21. After weighing the factors against how the Program is delivered, the Program is an accelerator program under the generally accepted meaning of accelerator program. | Detailed Reasoning - Accelerator program - specific requirements: 22. Item 4 contains 5 factors that an accelerator program must satisfy to be considered an eligible accelerator program: (i) a selection process is undertaken in which participants are selected in an open, independent and competitive manner (merit-based screening process); (ii) the company, not an individual, must complete the program; (iii) the program provides time-limited support to participants; (iv) the program provider has been providing the program (or other accelerator programs), for at least 6 months; and (v) at least one cohort has completed the program (or other accelerator programs) offered by the program provider. | Detailed Reasoning - A merit-based screening process: 23. 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. 24. Entity A provided details of the selection process undertaken to choose participants in the Program. | Detailed Reasoning - The company, not an individual, must complete the program: 25. In some instances, it is the founder of a company that is registered to undertake an accelerator program. To satisfy the requirements of subsection 360-45(1) the company itself must receive certification upon completion of the program. 26. This condition is a requirement that the participant must satisfy, rather than a requirement of the program. If the program provider offered the program to participants that are not companies, the fact that an entity other than a company can participate will not stop participants that are companies from meeting this condition. | Detailed Reasoning - Time-limited support: 27. An eligible program must provide time-limited support to entrepreneurs. The limited duration is the characteristic that most clearly defines accelerator programs. Generally speaking, a program will run for approximately 3 months, and no more than 6 months. 28. Established timelines and strict graduation dates are designed to reduce co-dependency, and to focus founders' attention. The pre-set time period also speeds up the cycle of the venture, leading to quicker success or failure. 29. The information provided by Entity A shows that the Program offers time-limited support to the Program participants. | Detailed Reasoning - Six month minimum period: 30. 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. 31. Entity A has been offering the Program since 20XX which is more than 6 months before 1 July 20XX so this requirement has been met. | Detailed Reasoning - Prior completion by a cohort of entrepreneurs: 32. 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. 33. The first income year this ruling applies to is the year ended 30 June 20XX, which is the first year in which the subsection 360-45 applied. 34. The first possible date than an investor had to determine if the company they invested in was an ESIC is 1 July 20XX. 35. As the first cohort completed the Program during the 20XX calendar year, this requirement was satisfied on 1 July 20XX. Therefore, this requirement has been met. | Detailed Reasoning - Conclusion - specific requirements: 36. In respect of the years ended 30 June 20XX to 30 June 20XX, the specific requirements of Item 4 have or will be met from 1 July 20XX until 30 June 20XX. | Detailed Reasoning - Overall Conclusion: 37. The Program is an accelerator program according to the generally accepted meaning, which also meets the requirements to be an eligible accelerator program under Item 4. [1] For consistency, although the quoted paragraph of the EM uses the word programme, we have used the word program in the rest of this ruling as that is the spelling used in Item 4 [2] The role and performance of accelerators in the Australian startup ecosystem - final report for the Department of Industry, Innovation & Science; UNSW Australia Business School, Feb 2016.