Private ruling: Early stage innovation company - 100 point test
Date of advice: 28 August 2019
Published: November 2019
Ruling period: Year ending 30 June 2020
Date scheme commenced: 1 July 2019

Ruling: Q1: Will 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. The Company obtained 50 points from the time an investor paid them at least $50,000 for the shares issued by the Company. | Q2: By acquiring the intellectual property rights via a Patent Assignment Agreement, did the Company obtain 50 points under item 6 of the table in subsection 360-45(1) of the ITAA 1997? | A2: Yes. The Company obtained 50 points when they were assigned the patent. | 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? | A3: Yes. The Company qualifies as an ESIC for the 2020 income year.

Relevant facts and circumstances: 1. The Company was incorporated in Australia during the 2019 income year. Its equity interests are not listed for quotation in the official list of any stock exchange. 2. The Company has no subsidiaries. Its expenses for the year ended 30 June 2019 totalled less than $1,000,000. It had nil assessable income in that year. 3. The Company purchased the business assets of another company via a Business Sale Agreement during the 2019 income year. The assets included the intellectual property, patent and trademarks associated with an innovative product. 4. Subsequently the Company received an investment in excess of $50,000 on in return for shares. Question 1 specific facts 5. The Company intends to expand into larger overseas markets. Accordingly the Company has established a relationship with an investor, who invested in excess of $50,000 in the Company under a Share Subscription Agreement with a Completion Date during the 2019 income year. 6. In accordance with a clause of the Share Subscription Agreement, the investor was required to immediately pay the sum exceeding $50,000 on completion. 7. The investor: · has not had any previous dealings with the shareholders of the Company or the business it purchased assets off. The investor has not been a shareholder or director of any companies, trusts or partnerships associated with these parties; · had no means of sufficiently influencing the Company; · is not a relative of the shareholders of the Company or the business it purchased assets off; and · did not hold a voting interest in the Company prior to the share acquisition. 8. The investor invested to participate in the potential success of the project (commercialising the product). Question 2 specific facts 9. Under a Patent Assignment Agreement dated during the 2019 income year, the Company was assigned a US utility patent. 10. The United States patent is a utility patent. IP Australia states that a utility patent is equivalent to an Australian standard patent. 11. The patent was originally granted to on less than five years ago.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 360-A | Income Tax Assessment Act 1997 section 360-40 | Income Tax Assessment Act 1997 subsection 360-45(1) | Income Tax Assessment Act 1936 subsection 318(2)

Reasons for decision: Summary: All legislative references are to the ITAA 1997 unless otherwise indicated. | 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: 1. 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 2. An investor paid in excess of $50,000 for shares in the Company during the 2019 income year. Parties that were not associates of the company immediately before the issue of those shares 3. An associate of a company is defined under subsection 318(2) of the Income Tax Assessment Act 1936 . 4. 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 5. The investor is an unrelated third party who acquired shares to participate in the potential success of the project. Therefore when the investor acquired their shares under the Share Subscription Agreement they were not an associate immediately prior to the shares being issued. Acquire those shares primarily to assist another entity become entitled 6. The investor acquired shares as an opportunity to participate in the potential success of the project. The investor is active in many business enterprises and is an active developer of new business activities and seeks out new, innovative business opportunities with significant growth potential. The primary purpose for investing was to provide expertise and capital necessary to assist the Company with its development and commercialisation activities. 7. It could not be concluded that in agreeing to participate in the potential success of the project that the investor's primary purpose in acquiring shares is to assist other investors to gain access to the offset. The company issued those shares at least one day before the test time 8. The Company issued the shares to the investor in the 2019 income year. Since the test time will be a particular point in the 2020 income year, the shares have been issued at least one day before the test time. Conclusion Item 5 9. The Company obtained 50 points under item 5 when the investor paid the Company in excess of $50,000 for their shares. | Summary: The Company obtained 50 points under item 6 of the table in subsection 360-45(1) when the Patent Assignment Agreement took effect. | Detailed Reasoning - Detailed reasoning: 10. 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. 11. The Company was named as the Assignee for a US patent. 12. The US patent is a utility patent which IP Australia has determined to be the equivalent to an Australian standard patent. 13. The US patent was granted within the last five years. For the whole of the year ended 30 June 2020 this patent was granted in the last five years. 14. Therefore the Company obtained 50 points from the date of execution of the Patent Assignment Agreement. | Summary: The Company meets the eligibility requirements of an ESIC under subsection 360-40(1). | Detailed Reasoning - Qualifying Early Stage Innovation Company: 15. 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': 16. 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): 17. 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). 18. 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. 19. 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): 20. 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): 21. 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): 22. 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: 23. 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 24. 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 2020. Current year 25. For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 2020 (the 2020 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 2020, 2019 and 2018, and the income year before the current year will be the year ending 30 June 2019 (the 2019 income year). | Detailed Reasoning - Early stage test: Incorporation or Registration - paragraph 360-40(1)(a) 26. As the Company was incorporated during the 2019 income year, which is within the last 3 income years, subparagraph 360-40(1)(a)(i) is satisfied. Total expenses - paragraph 360-40(1)(b) 27. 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) 28. 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) 29. 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 30. The Company 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. | Detailed Reasoning - 100-point test: 31. As concluded in our reasons for Question 1, the Company can apply the 50 points under item 5 of table in subsection 360-45(1) in the 2020 income year. 32. As concluded in our reasons for Question 2, the Company can apply the 50 points under item 6 of table in subsection 360-45(1) in the 2020 income year. Conclusion 33. The Company meets the eligibility criteria of an ESIC under section 360-40 in the year ending 30 June 2020 since they can apply the points under both items 5 and 6 of the table in subsection 360-45(1).