Private ruling: Early stage innovation companies
Date of advice: 30 September 2025
Published: 17 November 2025
Ruling period: Year ended 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: No.

Relevant facts and circumstances: 1. The Company was incorporated in Australia in 20XX. It does not have any wholly owned subsidiaries and its equity interests are not listed for quotation in the official list of any stock exchange. 2. The Company incurred expenses of less than $2 million and derived no assessable income in the 20XX income year. 3. The Company runs a membership and casual visit-based business offering services to subscribers. It offers users affordable, unlimited and anytime access. 4. Members may access an app which allows for self-service and automated session reservations, facility access, access to amenities and other personalised related content. 5. The Company currently has one location open, which is generating net profit. Additional locations were planned to open in the 20XX income year, with further locations elsewhere in Australia to follow. 6. The market is a niche subset of a broader industry which is worth several billion dollars. It is in its nascent stages and experiences offered by competitors vary greatly. 7. Due to the under-developed market, consumer costs tend to be high and accessibility of services is low. The business model is positioned to take advantage by reducing cost barriers and eliminating time restrictions. This will be enabled by the automated, self-serve nature of facilities as augmented by the app. 8. As at 20XX the Company generated monthly revenues from memberships and secondary sales such as casual visits. The forecast market size is $XX million in one city and $XXX million nationally.

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 360-40(1) | Income Tax Assessment Act 1997 paragraph 360-40(1)(a) | Income Tax Assessment Act 1997 paragraph 360-40(1)(b) | Income Tax Assessment Act 1997 paragraph 360-40(1)(c) | Income Tax Assessment Act 1997 paragraph 360-40(1)(d) | Income Tax Assessment Act 1997 paragraph 360-40(1)(e) | Income Tax Assessment Act 1997 subparagraph 360-40(1)(e)(i) | Income Tax Assessment Act 1997 subparagraph 360-40(1)(e)(ii) | Income Tax Assessment Act 1997 subparagraph 360-40(1)(e)(iii) | Income Tax Assessment Act 1997 subparagraph 360-40(1)(e)(iv) | Income Tax Assessment Act 1997 subparagraph 360-40(1)(e)(v) | Income Tax Assessment Act 1997 paragraph 360-40(1)(f)

Reasons for decision: Summary: The Company does not meet 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 its *100% subsidiaries (if any) incurred total expenses of $1 million or less; or iii. registered in the Australian Business Register (ABR) within the last three 3 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 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): 7. 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): 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 2 innovation tests: the objective (100 point) test or the principles-based test. | Detailed Reasoning - 'Principles-based test' - subparagraphs 360-40(1)(e)(i) to (iv): 10. 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. 11. 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. 12. The 5 requirements of the principles-based test, as outlined in paragraph 360-40(1)(e) are: i. the company must be genuinely focused on developing one or more new or significantly improved innovations for commercialisation ii. the business relating to that innovation must have a high growth potential iii. the company must demonstrate that it has the potential to be able to successfully scale up the business relating to the innovation iv. the company must 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 must 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: 13. 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] 14. 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. 15. 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. 16. 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] 17. 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. 18. 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.' 19. 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. 20. The EM does not define the meaning of the term 'genuinely focussed' within the context of subparagraph 360-40(1)(e)(i). Genuine is defined in the online Macquarie Dictionary as 'Being truly such; real; authentic.' Focus is defined as '3. a central point, as of attraction, attention, or activity. ... 8. to concentrate; to focus one's attention.' In essence, the phrase 'genuinely focussed' is looking to what the company is truly concentrating and focussing their attention on or, put another way, what is the real central point of the company's activities. 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, whereas 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 20XX income year. Current year 29. For the purposes of subsection 360-40(1), the current year will be the 20XX income year. | Detailed Reasoning - Early stage test: Incorporation or Registration - paragraph 360-40(1)(a) 30. As the Company was incorporated in 20XX, which is within the last 3 income years, the requirement in subparagraph 360-40(1)(a)(iii) is satisfied. Total expenses - paragraph 360-40(1)(b) 31. As the Company had expenses below $2 million in the prior income year, the requirement in paragraph 360-40(1)(b) is satisfied. Assessable income - paragraph 360-40(1)(c) 32. As the Company had no assessable income in the prior income year, the requirement in 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, the requirement in paragraph 360-40(1)(d) is satisfied. Conclusion on early stage test 34. 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 - Principles based test: Developing new or significantly improved innovations for commercialisation - subparagraph 360-40(1)(e)(i) 35. According to the Company the significantly improved innovation it is developing is the automated, self-serve nature of facilities as augmented by the app. 36. You further explained that the software platform is being developed and commercialised within Company-owned stores during the initial phase of development which, when mature, will enable white-label licensing of the software platform as a SAAS product to multi-site club membership businesses globally. 37. Although the industry in Australia is in its nascent stages, the broader industry has adopted technology platforms with the same features. Therefore, the software would not be a significantly improved innovation in this space. That is, multiple businesses operating within the industry utilise software platforms and apps to track memberships, providing payment capabilities, allow access and provide services for their members. Genuinely focussed on developing for commercialisation - subparagraph 360-40(1)(e)(i) 38. You advised the Company was also focussed on commercialising its software platform as a SAAS product that could be licenced once mature. Although the Company may be focussed on developing the software for this purpose, in addition to its use by members, it is not a significantly improved innovation for the purposes of subparagraph 360-40(1)(e)(i). Conclusion on subparagraph 360-40(1)(e)(i) 39. The Company is genuinely focussed on developing its platform for a commercial purpose. However, it will not be a significantly improved product compared to existing products and is not a new concept in the broader industry. 40. Therefore, the requirement in subparagraph 360-40(1)(e)(i) is not satisfied for the time period from 1 July 20XX until 30 June 20XX. High growth potential - subparagraph 360-40(1)(e)(ii) 41. The addressable market identified by the Company within Australia is worth $XXX million. Currently the Company is generating net profit from its location. With a business plan focussed on expanding to other locations there is scope for high growth in this timeframe. 42. Although the software will be primarily used by members initially, the software platform is being developed such that it can be 'white-label' licensed to multi-site membership-based customers. 43. If the commercialisation strategy is successful, this may give the Company the ability to grow its business into a larger addressable global market. 44. Therefore, the requirement in subparagraph 360-40(1)(e)(ii) is satisfied. Scalability - subparagraph 360-40(1)(e)(iii) 45. As the Company is developing a software technology, it is not impacted by factors such as manufacturing capability or size of premises. Ongoing costs would not be expected to increase in a linear fashion alongside its increase in market penetration. As the number of users increases, growth can be leveraged against already developed technology. 46. Therefore, the requirement in subparagraph 360-40(1)(e)(iii) is satisfied. Broader than local market- subparagraph 360-40(1)(e)(iv) 47. The Company is looking to expand its facilities before expanding throughout Australia. Once it is able to white-label licence its software it has a greater capacity to expand internationally. 48. The Company has the potential to address a broader market than just the local market, including international markets. Therefore, the requirement in subparagraph 360-40(1)(e)(iv) is satisfied. Competitive advantages - subparagraph 360-40(1)(e)(v) 49. The underlying software, as set out in paragraph 37, is not a significantly improved innovation within the industry. Consequently, it is unable to demonstrate that it provides a competitive advantage within the addressable market. It therefore does not satisfy the requirement in subparagraph 360-40(1)(e)(v). Conclusion on principles test 50. The Company does not satisfy the principles-based test, as it is unable to satisfy the requirements of subparagraphs 360-40(1)(e)(i) and 360-40(1)(e)(v) for the period commencing 1 July 20XX until 30 June 20XX. | Detailed Reasoning - Foreign Company Test: 51. As the Company was registered in Australia it is not a Foreign Company, the requirement in paragraph 52. 360-40(1)(f) is not satisfied. | Detailed Reasoning - Conclusion: 53. The Company does not meet the eligibility criteria of an ESIC under section 360-40 for the period commencing 1 July 20XX until 30 June 20XX. [1] See EM, paragraph 1.76. [2] OECD Oslo Manual, paragraphs 124 and 151.

Reasons for decision: These reasons for decision accompany the Notice of private ruling for the Company. | This is to explain how we reached our decision. This is not part of the private ruling. | All legislative references are to the ITAA 1997 unless otherwise indicated. | Question: Does the Company meet the criteria of an ESIC under subsection 360-40(1)?