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Edited version of your written advice
Authorisation Number: 1051304619062
Date of advice: 3 November 2017
Ruling
Subject: ESIC
Does Company A meet the criteria of an Early Stage Innovation Company (ESIC) under subsection 360-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
This ruling applies for the following period(s)
Year ended 30 June 2018
The scheme commences on
XX 2010
Relevant facts and circumstances
1. Company A was incorporated in Australia on Date X.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 360-A
Income Tax Assessment Act 1997 section 360-40
Reasons for decision
Summary
Company A does not meet the eligibility requirements of, an ESIC under, subsection 360-40(1).
Detailed reasoning
Qualifying Early Stage Innovation Company
2. 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.
‘The early stage test’
3. The early stage test requirements are outlined in detail within paragraphs 360-40(1)(a) to (d).
Incorporation or Registration – paragraph 360-40(1)(a)
4. 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).
5. 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.
6. A company that does not meet any of these conditions will not qualify as an ESIC.
Total expenses - paragraph 360-40(1)(b)
7. 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.
Assessable income - paragraph 360-40(1)(c)
8. 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.
No stock exchange listing - paragraph 360-40(1)(d)
9. 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.
Innovation tests
10. 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. These tests determine whether the company is developing new or significantly improved innovations to generate an economic return.
Application to your circumstances
Test time
11. For the purposes of this ruling, the test time for determining if Company A is a qualifying ESIC will be a particular date during the income year ending 30 June 2018.
Current year
12. For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 2018 (the 2018 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 2018, 2017 and 2016, and the income year before the current year will be the year ending 30 June 2017 (the 2017 income year).
Early stage test
Incorporation or Registration – paragraph 360-40(1)(a)
13. As Company A was incorporated on Date X, which is more than 8 years ago, subparagraphs 360-40(1)(a)(i) – (a)(iii) is not satisfied.
Conclusion on early stage test
14. Company A will not satisfy the early stage test for the entire 2018 income year, as the requirements within paragraphs 360-40(1)(a) have not been satisfied.
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