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Edited version of your written advice

Authorisation Number: 1051462104533

Date of advice: 30 November 2018

Ruling

Subject: Early Stage Innovation Company

Question

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)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Company was incorporated in Australia in the 20XX income year. Its equity interests are not listed for quotation in the official list of any stock exchange.

The Company has no subsidiaries and in the year ended 30 June 20XX had expenses of less than $XXX and no assessable income.

The Company is developing a new medical platform technology, specifically designed to improve performance and reduce the risk of complications, in a wide range of applications.

The Company has a written agreement to commercialise the platform technology with the owner of the Intellectual Property (IP). The written agreement is an exclusive license, and gives the Company access and control over a portfolio of IP.

The medical technology, when developed, will reduce the risk of failure and revision surgery. As a platform technology, the technology can also be adapted to suit many other applications.

The Company has a structured plan to complete the development of the technology, with all the product development including testing required, and to create a data package to present to a target company for partnering or acquisition. The Company has initiated preliminary discussions with several leading multinational medical companies overseas.

The global market is estimated to be US$XXXX.

The Company provided an Investor Memorandum, Investor Presentation and Licence Agreement, all of which were referred to in this ruling.

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

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise indicated.

Summary

The Company meets the eligibility requirements of, an ESIC under, subsection 360-40(1).

Detailed reasoning

Qualifying Early Stage Innovation Company

‘The early stage test’

Incorporation or Registration – paragraph 360-40(1)(a)

Total expenses - paragraph 360-40(1)(b)

Assessable income - paragraph 360-40(1)(c)

No stock exchange listing - paragraph 360-40(1)(d)

Innovation tests

‘Principles-based test’ – subparagraphs 360-40(1)(e)(i) to (iv)

Developing new or significantly improved innovations for commercialisation

High growth potential

Scalability

24. The company must be able to demonstrate that it has the potential to successfully scale up the business relating to the innovation. 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.

Broader than local market

25. 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.

Competitive advantages

26. 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.

Application to your circumstances

Test time

27. 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.

Current year

28. For the purposes of subsection 360-40(1), the current year will be the year ended 30 June 20XX (the 20XX income year).

Early stage test

Incorporation or Registration – paragraph 360-40(1)(a)

29. As the Company was incorporated in the 20XX 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)

30. 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)

31. 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)

32. As the Company is privately owned and is not listed on any stock exchange in Australia or a foreign country, subparagraph 360-40(1)(d) is satisfied.

Conclusion on early stage test

33. The Company will satisfy the early stage test for the entire 2019 income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.

Principles based test

Developing new or significantly improved innovations – subparagraph 360-40(1)(e)(i)

35. The technology reduces the likelihood of revision surgery being required and where it is required, safer revision surgery.

Genuinely focussed on developing for commercialisation – subparagraph 360-40(1)(e)(i)

37. To satisfy this part of test, the Commissioner considers that a company must own the innovation in order to be developing it for commercialisation. In this instance, the Intellectual Property (IP) for the platform technology is owned by a third party.

38. The Company has a written agreement to commercialise the medical technology. The written agreement is to an exclusive license,

39. Since the Company has an exclusive licence, the Commissioner considers that it is genuinely focussed on developing the innovation for commercialisation.

40. Additionally, the Investor Memorandum sets out its plan to complete the development of the technology and to create a data package to present to a target company for partnering or acquisition.

Conclusion on subparagraph 360-40(1)(e)(i)

High growth potential – subparagraph 360-40(1)(e)(ii)

44. The global market is estimated to be US$XXXX and predicted to grow a compound annual growth rate of 7.2%.

45. The Company’s technology platform has the potential to access this market. It can reasonably demonstrate a high growth potential exists for the product. Subparagraph 360-40(1)(e)(ii) is satisfied.

Scalability – subparagraph 360-40(1)(e)(iii)

46. The platform technology can be adapted to suit many different applications.

47. The adaptability and flexibility of the technology is indicative of a capacity to scale up the business. It is therefore accepted that the Company can demonstrate the potential to successfully scale up its business. Subparagraph 360-40(1)(e)(iii) is satisfied.

Broader than local market- subparagraph 360-40(1)(e)(iv)

48. As stated above, the global market is estimated to be US$XXXX. The Company has already initiated discussions with several leading medical companies overseas.

Competitive advantages – subparagraph 360-40(1)(e)(v)

51. While competitors offer similar products, the advantage of the Company’s technology is that it will firstly reduce the amount of revision surgeries required, while secondly allowing for safer surgery in instances where revision is required.

52. In addition, the technology has been protected by three application stage patent families

Conclusion on principles test

Conclusion


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