Private ruling: Early-stage innovation company qualification
Date of advice: 16 February 2026
Published: 7 April 2026
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

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, trading as 'X' (the Company) was incorporated in Australia in 2025. Its equity interests are not listed for quotation in the official list of any stock exchange. 2. The Directors of the Company are Person X and Person Y. 3. The Company's principal place of business is a State, Australia. 4. The Company is not part of an income tax consolidated group. 5. The Company has no 100% owned subsidiaries and has expenses of less than $1 million in the previous income year, i.e. the year ended 30 June 20XX. Its assessable income is less than $200,000. 6. The Company's goal is to provide an innovative, unique real-time communication platform that enables users to interact in a certain way (i.e. 'X'). The Company has identified its ultimate market as being the global market, with its initial target being international markets. 7. The application highlights a number of the key differentiators. 8. The application states the research and development focus areas. 9. Expertise of Founders - executive team summary provided. 10. There is currently an employee who reports to the CTO, with information on following planned hires provided. 11. The application outlines the intellectual property involved in the Innovation. The product offering - product and product development 12. The application calls X 'a new product currently unavailable in the market', says the Company is continuing to develop it for commercialisation and describes how it is innovative in its field. 13. The application goes through what X comprises. 14. The application states X is a revolutionary new product. Rather than 'reinventing the wheel', the Company has developed proprietary software. 15. The application reviews the 'failure of current market offerings and states that X significantly outperforms the various competitors. 16. The application states X will be the first to deliver this product and highlights a gap in the market. This is X's fundamental innovation. 17. The application states what X's breakthrough achieves. 18. The application provides a market validation of the 'gap' X will fill. 19. The application outlines industry analysis undertaken. 20. To achieve market leadership and address emerging regulatory requirements, the Company plans to implement these innovations via a technical innovation roadmap - provided. Each phase addresses specific market failures and regulatory requirements while maintaining first-mover advantage. 21. The application explains that research reveals a critical market failure and states this innovation directly addresses it. 22. The application explains what differentiates X from competitors in a certain area. Market position 23. The Company has identified its addressable market. 24. X is aimed at a broad market well beyond any local or even national region, including international enterprise. X is inherently global, delivered over the internet and equipped with multilingual capabilities. 25. The Company has provided a market research report which shows market size and growth projections, regional distribution across the world, and market segmentation by 'use case' market share. 26. It also shows market opportunities, being underserved segments. And further, geographic opportunities. 27. Certain market segments have been identified as target market priorities. 28. The market research report provided shows the go-to-market approach. 29. The 3-year expansion strategy was provided. 30. Evidence of international demand was provided. 31. International capabilities were outlined. 32. The market research report outlines the opportunity and how X is positioned to capture significant market share by 2030. Commercialisation strategy 33. X's commercialisation plan is to generate economic value through a model using a methodology which was provided. 34. Development progress to date: • Working minimum viable product (MVP) with complete functionality developed • Six clients already on boarded • Partnership discussions • X • Patentable systems and technology development • Beta program scheduled for Q4 20XX • Public launch Q1 20XX 35. Go-to-market strategy: (a) Initial recruitment already obtained through personal relationships/word of mouth and sales outreach (b) Leverage inherent distribution (c) Partnership discussions 36. Market validated pricing strategy: X's research confirms premium pricing viability. Growth Potential 37. The application addresses high growth potential by reviewing market opportunity, competitive landscape, growth projections and drivers. 38. Success metrics and targets were provided. 39. The Financial Projections & Unit Economics document provided shows investment requirements. Scalability 40. The application addresses technical scalability and business model scalability. Competitive advantages 41. The Market Research Report provided gives a detailed 'competitive landscape analysis - major player comparison'. 42. The application puts forward the unique value proposition. 43. The application provides an analysis of unique technical and strategic advantages. 44. The application shows technical achievements vs competition. 45. The application outlines competitors' barriers to entry. Evidence of development progress 46. The application outlines technical milestones and provides a detailed breakdown of each of the various phases leading to commercialisation. In summary: • Phase 1: Foundation and core platform (currently in development - completion Q4 2025) • Phase 2: Advanced capabilities (2026-2027) • Phase 3: Market Leadership (2027+) 47. R&D success indicators were provided. 48. Technical complexity growth was outlined. 49. Global expansion strategy: Phase 1: English-speaking markets with single region Phase 2: Multi-language support with regional deployment Phase 3: Global presence with local compliance Phase 4: Emerging markets with lightweight versions Information provided 50. You provided information in your private ruling application, including appendices of Financial Projections & Unit Economics, Technical Architecture, Market Research Report, Corporate Profiles, mock up screen shots, Legal & Compliance Framework and Partnership Pipeline document. 51. We have referred to the relevant information within these documents in applying the relevant tests to your circumstances. 52. The Company intends to issue new ordinary class shares in the Company to various investors in the current financial year to assist in funding the continued development and commercialisation of X.

Relevant legislative provisions: Income Tax Assessment Act 1997 subdivision 360-A | Income Tax Assessment Act 1997 section 360-40

Reasons for decision: Summary: All legislative references are to the ITAA 1997 unless otherwise indicated. 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 outlined in detail within paragraphs 360-40(1)(a) to (d). | Detailed Reasoning - Incorporation or Registration - paragraph 360-40(1)(a): 3. 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 6 income years (the latest being the current year), and across the last 3 of those income years before the current year it and any *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). 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. To meet the requirement in paragraph 360-40(1)(b), the company and any 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): 7. To meet the requirement in paragraph 360-40(1)(c), the company and any 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): 8. 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: 9. 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 - '100-point test' - paragraph 360-40(1)(e) and section 360-45: 10. To satisfy the 100-point test the company must obtain at least 100 points by meeting the innovation criteria in the table within section 360-45. The criteria are tested at a time immediately after the relevant shares are issued. If a company satisfies this test it does not need to satisfy the principles-based test. | Detailed Reasoning - 'Principles-based test' - subparagraphs 360-40(1)(e)(i) to (v): 11. To satisfy the principles-based test, the company must meet five requirements in paragraph 360-40(1)(e). This is tested at a time immediately after the relevant new shares are issued to the investor. 12. The company can demonstrate that it meets each requirement through existing documentation such as a business plan, commercialisation strategy, competition analysis or other company documents. The company must be able to show that tangible steps have been or will be taken in relation to each of the requirements. 13. The five requirements of the principles-based test, as outlined in paragraph 360-40(1)(e) are: (i) the company is genuinely focused on developing for commercialisation one or more new or significantly improved products, processes, services or marketing or organisational methods; and (ii) the business relating to those products, processes, services or methods has a high growth potential; and (iii) the company can demonstrate that it has the potential to be able to successfully scale that business; and (iv) the company can demonstrate that it has the potential to be able to address a broader than local market, including global markets, through that business; and (v) the company can demonstrate that it has the potential to be able to have competitive advantages for that business. | Detailed Reasoning - Developing new or significantly improved innovations for commercialisation: 14. For the purposes of Subdivision 360-A, the Explanatory Memorandum to the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 ('EM') provides the following at paragraph 1.76 in relation to the definition of innovation: Implicit in the definition of innovation is the requirement that the company is developing a new or significantly improved type of innovation such as a product, process, service, marketing or organisational method. This list of various types of innovations provides flexibility for innovation companies and is adaptable to current and future innovations. The Oslo Manual, published by the Organisation for Economic Co-operation and Development (OECD) provides a description of these different types of innovations... [1] 15. The Innovation being developed by the company must either be new or significantly improved for an applicable addressable market. The company's addressable market is the revenue opportunity or market demand arising from the Innovation or the related business. The addressable market must be objective and realistic. 16. Improvements must be significant in nature to meet this requirement. Customising existing products or minor changes resulting from software updates, pricing strategies or seasonal changes are examples of improvements that would not be considered significant. 17. The OECD Oslo Manual defines innovations as significant changes, with the intention of distinguishing significant changes from routine minor changes. However, it is important to recognise that an innovation can also consist of a series of smaller incremental changes that together constitute a significant change. [2] 18. In discussing services innovation activity, paragraph 111 of the OECD Oslo Manual states, Innovation activity in services also tends to be a continuous process, consisting of a series of incremental changes in products and processes. This may occasionally complicate the identification of innovations in services in terms of single events, i.e. as the implementation of a significant change in products, processes or other methods. 19. The OECD Oslo Manual, in relation to defining innovative services, states at paragraph 161 that "innovations in services can include significant improvements in how they are provided (for example, in terms of their efficiency or speed), the addition of new functions or characteristics to existing services, or the introduction of entirely new services." 20. The company must be genuinely focused on developing the Innovation for a commercial purpose in order to generate economic value and revenue for the company. This requirement draws the distinction between simply having an idea and commercialising an idea. 21. 'Commercialisation' includes a range of activities that involve the implementation or sale of a new or significantly improved innovation that will directly lead to the generation of economic value for the company. | Detailed Reasoning - High growth potential: 22. The company must be able to demonstrate that it has the potential for high growth within a broad addressable market. This refers to the company's ability to rapidly expand its business. Companies that are limited to supplying local customers will not meet this requirement. | Detailed Reasoning - Scalability: 23. The company must be able to demonstrate that it has the potential to successfully scale up the business. The company must have operating leverage, where as it increases its market share or enters into new markets, its existing revenues can be multiplied with a reduced or minimal increase in operating costs per unit. | Detailed Reasoning - Broader than local market: 24. The company must be able to demonstrate that it has the potential to address a market that is broader than a local city, area or region. The company does not need to have a serviceable market at a national, multinational or global scale at the test time. However, it does need to show that the business is capable of addressing a market that is broader than a local market and that the business can be adapted to a broader scale in the future. | Detailed Reasoning - Competitive advantages: 25. The company must be able to demonstrate that it has the potential to have competitive advantages, such as a cost or differential advantage over its competitors which are sustainable for the business as it expands. The company can analyse what competitors in the market offer and consider whether the company has a differentiating advantage that would allow it to outperform these competitors. | Detailed Reasoning - Foreign Company test - paragraph 360-40(1)(f): 26. At the test time, the company must not be a foreign company within the meaning of the Corporations Act 2001. 27. The dictionary in section 9 of the Corporations Act 2001 defines a foreign company to mean: (a) a body corporate that is incorporated in an external Territory, or outside Australia and the external Territories, and is not: (i) a corporation sole; or (ii) an exempt public authority; or (b) an unincorporated body that: (i) is formed in an external Territory or outside Australia and the external Territories; and (ii) under the law of its place of formation, may sue or be sued, or may hold property in the name of its secretary or of an officer of the body duly appointed for that purpose; and (iii) does not have its head office or principal place of business in Australia. | Detailed Reasoning - Application to your circumstances: Test time 28. 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 2026. Current year 29. For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 2026 (the 2026 income year). The income year before the current year will be the year ending 30 June 2025 (the 2025 income year). | Detailed Reasoning - Early-stage test: Incorporation or Registration - paragraph 360-40(1)(a) 30. As the Company was incorporated on a date in 2025 which is within the last 3 income years, subparagraph 360-40(1)(a)(i) is satisfied. Total expenses - paragraph 360-40(1)(b) 31. As the Company had expenses of $1 million or less in the prior income year (the 2025 income year) paragraph 360-40(1)(b) is satisfied. Assessable income - paragraph 360-40(1)(c) 32. As the Company's assessable income in the prior income year (the 2025 income year) is $200,000 or less paragraph 360-40(1)(c) is satisfied. No stock exchange listing - paragraph 360-40(1)(d) 33. 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 34. The Company will satisfy the early-stage test for the entire 2026 income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied. | Detailed Reasoning - 100-point innovation test: 35. As an alternative to satisfying the principle-based test for a qualifying ESIC, a company may be a qualifying ESIC if it has at least 100 points for meeting certain objective innovation criteria. The 100-point test is provided as an alternative innovation test providing the company with a self-assessment test. | Detailed Reasoning - Principles based test: Developing new or significantly improved innovations for commercialisation - subparagraph 360-40(1)(e)(i) 36. There are three interacting elements that needs to be addressed: (a) New, significantly improved, product, process, service or marketing method or organisational method - the Innovation; (b) Developing for commercialisation; and (c) Genuinely focussed. 37. According to the Company, the Innovation is a unique product that enables users to do something that does not currently exist in the market. The Company has identified its ultimate market as being the global market, with its initial target being international markets. 38. X's proprietary software is a revolutionary new product. 39. The application states X will be the first platform globally to deliver this product. The market reveals a striking gap, and this is where X's fundamental innovation lies. Genuinely focussed on developing for commercialisation - subparagraph 360-40(1)(e)(i) 40. The Company's commercialisation plan is to generate economic value through a certain revenue model. The Company has undertaken market research, done financial projections and unit economic analysis and created a legal and compliance framework. The Company has an employee who reports to the CTO working on core development and has taken the following steps in developing X: (a) Working minimum viable product (MVP) with complete functionality developed (b) Six clients already on boarded (c) Partnership discussions (d) X (e) Patentable systems and technology development (f) Beta program scheduled for Q4 2025 (g) Public launch Q1 2026 41. The application states: • Engaging IP and copyright legal advisors • Developing comprehensive licensing frameworks for cross-border rights • Ensuring full compliance with laws across all target jurisdictions 42. The timeline provided shows that the Company plans a staged technology build approach as follows: (a) Phase 1: Foundation and core platform (completion Q4 2025) (b) Phase 2: Advanced capabilities (2026-2027) (c) Phase 3: Market leadership (2027+) 43. To achieve market leadership and address emerging regulatory requirements, X plans to implement these innovations via a technical innovation roadmap, which was provided. Each phase addresses specific market failures and regulatory requirements while maintaining first-mover advantage. 44. The Company's go-to-market strategy is to start with certain contacts and leverage from there. Initial recruitment has already been obtained through personal relationships/word of mouth and sales outreach. The Company is in partnership discussions. 45. The Company has a staged plan to increase its workforce. Conclusion on subparagraph 360-40(1)(e)(i) 46. The Company is genuinely focussed on developing the Innovation (X) for a commercial purpose. The Innovation will be a significantly improved product compared to existing products. 47. Therefore subparagraph 360-40(1)(e)(i) will be satisfied for the time period from 1 July 2025 until 30 June 2026 or the date when X has been fully developed, whichever occurs earliest. Once X has been fully developed, the Company will no longer be developing the product for commercialisation and subparagraph 360-40((1)(e)(i) will no longer be satisfied. High growth potential - subparagraph 360-40(1)(e)(ii) 48. The Company expects the Innovation to appeal to a wide range of industries. 49. The Company cites certain reasons as creating the perfect market conditions for X's revolutionary solution. 50. The Company cites the unprecedented growth in the relevant market and the competitive landscape as validating high growth potential. 51. The Company has provided growth projections. 52. The Company is developing the Innovation themselves. The Financial Projections & Unit Economics model provided shows the Company will make revenue through certain unit economics with gross margins of 55-91%, corporate licensing, advertising and a subscription pilot. 53. If the commercialisation strategy is successful, this may give the Company the ability to increase sales. 54. Therefore subparagraph 360-40(1)(e)(ii) will be satisfied. Scalability - subparagraph 360-40(1)(e)(iii) 55. X's operations are designed for scalability. It is cloud-based, modular inference pipeline architecture, supported by auto-scaling serverless technologies that dynamically expand to maintain low latency response times, even under heavy world-wide usage. 56. The Financial Projections & Unit Economics model provided illustrates the increase in projected sales. The payment model ensures linear cost scaling and the Company cites various automation as operational leverage. 57. Given that X will be available globally, it is expected that the Company has the potential to successfully scale up its business. 58. The Company's strategy for the use of X will be able to generate increased revenue with the payment model but have less overheads due to the automation model employed. This operating leverage affords the Company the potential to successfully scale up its business. Therefore subparagraph 360-40(1)(e)(iii) will be satisfied. Broader than local market- subparagraph 360-40(1)(e)(iv) 59. The Company has identified its addressable market as a rapidly growing market. The Market Research Report concludes it is positioned to capture significant market share by 2030. 60. X will initially be targeted at international markets but is intended for worldwide use. It will be released globally once it gains traction in the initial targeted markets. 61. X is aimed at a broad market well beyond any local or even national region, including international enterprise. X is inherently global, delivered over the internet and equipped with multilingual capabilities. It is cloud based, allowing delivery to any location, it has multi-currency support, language support expansion is planned and there are no geographic or time zone restrictions. 62. The Company has provided a Market Research Report which shows market size and growth projections, regional distribution across the world, market segmentation by 'use case' market share and certain market segments have been identified as 'target market priorities'. The Company's expansion strategy has been provided. 63. The Company has demonstrated X has the potential to address a broader market than just the local market, including international markets. Therefore subparagraph 360-40(1)(e)(iv) will be satisfied. Competitive advantages - subparagraph 360-40(1)(e)(v) 64. The application states X has various differentiating features which may give it a competitive advantage. 65. The combined expertise of the founders/executive team may also act as a competitive advantage. 66. The Market Research Report provided gives a 'competitive landscape analysis - major player comparison'. The application puts forward that competitors will have numerous barriers to entry. 67. Being the first of such innovation, the Company has the first mover advantage. The Company has demonstrated the potential for X to have competitive advantages within the 'addressable market'. Therefore subparagraph 360-40(1)(e)(v) will be satisfied. Conclusion on principles test 68. The Company satisfies the principles-based test as it satisfies the requirements within subparagraphs 360-40(1)(e)(i) to (v) for the period commencing 1 July 2025 until 30 June 2026 or the date when the Innovation has been fully developed and is ready for sale, whichever occurs earlier. | Detailed Reasoning - Foreign Company Test: 69. As the Company was incorporated in Australia it is not a Foreign Company and paragraph 360-40(1)(f) is satisfied. | Detailed Reasoning - Conclusion: 70. The Company meets the eligibility criteria of an ESIC under section 360-40 for the period commencing 1 July 2025 until the earlier of 30 June 2026 or the date when the Innovation has been fully developed and is ready for sale, whichever occurs earlier. [1] See Explanatory Memorandum to the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016, paragraph 1.76. [2] OECD Oslo Manual, paragraph 124 and paragraph 151.