Private ruling: Early stage innovation company qualification
Date of advice: 21 November 2022
Published: 23 January 2023
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 is incorporated in Australia. Its equity interests are not listed for quotation in the official list of any stock exchange. 2. The Company has no wholly owned subsidiaries. 3. The Company had expenses of less than $X million and assessable income of less than $XXX in the previous income year. 4. The Company is a company that licences certain intellectual property from a university to develop and commercialise products using the licensed intellectual property. 5. The Company entered into the following licence agreements with the university: • the Licence Agreement (Current Patent), and • the Licence Agreement (Provisional Patent). 6. The Company has licenced the rights to commercialise products developed in whole or in part from an international patent. 7. An investor unrelated to the Company subscribed for over $50,000 and was issued shares in the Company. 8. The Company undertook a capital raise (the Capital Raise) sometime after the unrelated investor subscribed for and was issued the shares.

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 | Corporations Act 2001 section 9

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 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 - Research and development claims above a certain threshold (item 1): 11. A company will be awarded 75 points if: At least 50% of the company's total expenses for the previous income year is expenditure that the company can notionally deduct for that income year under section 355-205 (about R & D expenditure) | Detailed Reasoning - Received an Accelerating Commercialisation Grant (item 2): 12. A company will be awarded 75 points if they have received an Accelerating Commercialisation Grant under the program administered by the Commonwealth known as the Entrepreneurs ' Programme: | Detailed Reasoning - Research and development claims above a certain threshold (item 3): 13. A company will be awarded 50 points if At least 15%, but less than 50%, of the company's total expenses for the previous income year is expenditure that the company can notionally deduct for that income year under section 355-205 (about R & D expenditure). | Detailed Reasoning - Completed or undertaking eligible accelerator programme (item 4): 14. A company will be awarded 50 points under item 4 of the table in subsection 360-45(1) if: (a) the company has 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. | Detailed Reasoning - Third party has invested at least $50,000 (item 5): 15. A company will be awarded 50 points under item 5 of the table in subsection 360-45(1) where: (a) a total of at least $50,000 has been paid for *equity interests that are *shares in the company; and (b) the company issued those shares to one or more entities that: (i) were not *associates of the company immediately before the issue of those shares; and (ii) did not *acquire those shares primarily to assist another entity become entitled to a *tax offset (or a modified CGT treatment) under this Subdivision; and (c) the company issued those shares at least one day before the test time | Detailed Reasoning - Holds certain enforceable intellectual property rights (item 6): 16. A company will be awarded 50 points under item 6 of the table in subsection 360-45(1) if it has one or more enforceable rights on an innovation as: (i) the patentee, or a licensee, of a standard patent; or (ii) the owner, or a licensee, of a plant breeder's right granted in Australia within the last 5 years (ending at the test time); or (b) the company has equivalent rights under a *foreign law. | Detailed Reasoning - Holds certain enforceable intellectual property rights (item 7): 17. A company will be awarded 25 points under item 7 of the table in subsection 360-45(1) if Unless item 6 applies to the company at the test time: (a) the company has rights (including equitable rights) under a *Commonwealth law as: (i) the patentee, or a licensee, of an innovation patent granted and certified in Australia; or (ii) the owner, or a licensee, of a registered design registered in Australia; within the last 5 years (ending at the test time); or (b) the company has equivalent rights under a *foreign law. | Detailed Reasoning - Collaborative agreement with research organisation or university to commercialise an innovation (item 8): 18. A company will be awarded 25 points if it has a written agreement to co-develop and commercialise an innovation with either: | Detailed Reasoning - Foreign Company test - paragraph 360-40(1)(f): 19. At the test time, the company must not be a foreign company within the meaning of the Corporations Act 2001. 20. 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 - Test time: 21. 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 20xx. | Detailed Reasoning - Current year: 22. For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 20xx. The income year before the current year will be the year ending 30 June 20xx. | Detailed Reasoning - Early stage test: Incorporation or Registration - paragraph 360-40(1)(a) 23. The Company was incorporated within the last 3 income years, subparagraph 360-40(1)(a)(i) is satisfied. Total expenses - paragraph 360-40(1)(b) 24. 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) 25. As the Company's assessable income for the prior income year is less than $200,000 paragraphs 360-40(1)(c) is satisfied. No stock exchange listing - paragraph 360-40(1)(d) 26. As the Company is not listed on any stock exchange in Australia or a foreign country, subparagraph 360-40(1)(d) is satisfied. | Detailed Reasoning - Conclusion on early stage test: 27. The Company will satisfy the early stage test for the entire 20xx income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied. | Detailed Reasoning - 100 point innovation test: 28. The Company can meet the requirements of paragraph 360-40(e) if it has at least 100 points at a particular time (the test time) in an income year (the current year) as mentioned in the items in the table, in section 360-45. 29. The Company is seeking confirmation that it meets the 100 points test by relying on the following items from the table in subsection 360-45(1): • Item 5: a third party has previously invested at least $50,000 • Item 6: they hold certain enforceable intellectual property rights • Item 8: they have a collaborative agreement with research organisation or university to commercialise an innovation. | Detailed Reasoning - Third party prior investment $50,000 - item 5 in the table in subsection 360-45(1): 30. The 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 not 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 - At least $50,000 has been paid for equity interests that are shares in the company: 31. This condition has been satisfied as an investor paid $y for shares in the Compnay which were issued to the investor. | Detailed Reasoning - Parties were not associates of the company immediately before the issue of those shares: 32. An associate of a company is defined under subsection 318(2) of the Income Tax Assessment Act 1936 (ITAA 1936) . 33. The investor is an unrelated third party and not an associate (within the meaning of section 318 of the ITAA 1936) of the Company immediately before the issue of the shares. | Detailed Reasoning - Acquire shares primarily to assist another entity become entitled to the tax incentives: 34. The investor did not acquire these shares to assist another entity to become entitled to a tax offset or modified CGT treatment under the ESIC rules, but rather to achieve a direct interest in the Company and directly participate in the Company's future growth opportunities. | Detailed Reasoning - The company issued those shares at least one day before the test time: 35. The Company issued these shares to the investor on x date, which is more than one day before the test time started when the capital raising took place. | Detailed Reasoning - Conclusion Item 5: 36. The Company can apply the 50 points as it satisfies each of the requirements listed under item 5 of the table in subsection 360-45(1). | Detailed Reasoning - Intellectual property rights- item 6 in table, subsection 360-45(1): 37. The Company will be awarded 50 points if it has rights (including equitable rights) on an innovation as a patentee, or licensee of a standard patent granted and certified in Australia in the last five years; or the company has equivalent rights under a foreign law. 38. As The Company entered into a licence agreement with a university which provides for the Company to exclusively licence the international patent and commercialise any products derived in whole or part from the IP throughout the world. 39. The Company can apply the 50 points under item 6 of the table in subsection 360-45(1) | Detailed Reasoning - Collaborative agreement - item 8 in table, subsection 360-45(1): 40. The 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 . 41. The Company has a written agreement to co-develop and commercialise the innovation with a university which is an institution or body registered under section 29A of the Industry Research and Development Act 1986 as it is a Registered Service Provider. 42. The Company can apply 25 points under item 8 of the table in subsection 360-45(1). | Detailed Reasoning - Conclusion on the 100 points test: 43. The Company satisfies the 100 points test as it satisfies the requirements of items 5, 6 and 8 of the table in subsection 360-45(1) of the ITAA 1997. | Detailed Reasoning - Foreign Company test - paragraph 360-40(1)(f): 44. The Company was incorporated in Australia it is not a foreign company and satisfies the requirements within paragraphs 360-40(1)(f). | Detailed Reasoning - Conclusion: 45. The Company meets the eligibility criteria of an ESIC under section 360-40 for the period commencing 1 July 20xx until the earlier of 30 June 20xx or the date when the Innovation has been fully developed and is ready for sale, whichever occurs earlier.