Edited version of your written advice

Authorisation Number: 1051500372517

Date of advice: 29 March 2019

RULING

Subject: Early Stage Innovation Company - eligibility renewal.

Question:

Does Company A satisfy the criteria of an Early Stage Innovation Company (ESIC) pursuant to subsection 360-40(1) of the Income Tax Assessment Act 1997 (‘ITAA 1997’)?

Answer:

Yes

This ruling applies for the following periods:

1 XX 20XX to 30 YY 20YY

The scheme commences on:

1 XX 20XX

RELEVANT FACTS AND CIRCUMSTANCES

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1. Company A is a proprietary company incorporated and registered in the Australian Business Register on 3 XX 20XX.

2. Company A has issued ordinary shares to various shareholders since its registration in XX 20XX.

3. Company A’s equity interests are not listed for quotation in the official list of any stock exchange, either in Australia or a foreign country.

4. Company A is developing a ‘service’ to bring together third-party vendors on products and services in a market – by consolidating products to a one-stop shop website.

5. In a ruling for a previous period, Company A qualified as an ESIC at relevant test times. The basis for the decision was that the company satisfied the principles based test in respect of the ‘service’ being developed.

6. Since the ruling issued, Company A has continued to develop their ‘service’. They predict that there is still approximately x months of development required before the ‘service’ is fully developed. Company A expects to have a usable prototype by XX 20XX and a completed product closer to YY 20YY.

Information provided

7. You have provided a number of documents containing detailed information in relation to Company A, including:

a. Private Binding Ruling (‘PBR’) Application, dated XX XX 20XX

b. Appendix A – A Memorandum to Company A’s Director, dated Y YY 20YY

c. Responses to further information as requested by the ATO

d. Responses to numerous telephone conversations and emails

8. We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Assumption(s)

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 section 360-15

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 Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

QUESTION:

SUMMARY

Company A meets the eligibility requirements of an ESIC pursuant to subsection 360-40(1).

DETAILED REASONING

Qualifying Early Stage Innovation Company

9. 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’

10. 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)

11. 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).

12. 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.

13. A company that does not meet any of these conditions will not qualify as an ESIC.

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

14. 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)

15. 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)

16. 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

17. 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.

‘100 point test’ – paragraph 360-40(1)(e) and section 360-45

18. 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.

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

19. 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.

20. 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.

21. The five requirements of the principles-based test, as outlined in paragraph 360-40(1)(e) are:

i. the company must be genuinely focussed on developing for commercialisation one or more new or significantly improved products, processes, services or marketing or organisational methods

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.

APPLICATION TO YOUR CIRCUMSTANCES

TEST TIME

22. For the purposes of this ruling, the ‘test time’ for determining if Company A is a qualifying ESIC, will be upon the issue of qualifying shares on a particular date or dates on or after 1 XX 20XX, and on or before 30 YY 20YY.

Current year

23. Therefore, for the purposes of subsection 360-40(1) ITAA 1997, the current year will be the year ending 30 June 201X (the 201X income year). For clarity, in relation to particular requirements within subsection 360-40(1), the last 3 income years will include the years ending 30 June 201X, 201X-1 and 201X-2, and the income year before the current year will be the year ending 30 June 201X-1 (the 201X-1 income year).

THE ‘EARLY STAGE TEST’ – paragraphs 360-40(1)(a) - (d) ITAA 1997

Incorporation or Registration – paragraph 360-40(1)(a) ITAA 1997

24. Company A was incorporated on X XX 20XX, which is within the 3 income years outlined above, therefore the requirements of subparagraph 360-40(1)(a)(i) are satisfied.

Total expenses – paragraph 360-40(1)(b) ITAA 1997

25. In applying the requirements of paragraph 360-40(1)(b), Company A and any of its 100% subsidiaries must have incurred total expenses of $1 million or less in the 2017 income year, being the income year before the current year.

26. Company A incurred expenses of $xx.00 in the 20XX income year. Consequently, paragraph 360-40(1)(b) is satisfied.

Assessable income – paragraph 360-40(1)(c) ITAA 1997

27. In applying the requirements of paragraph 360-40(1)(c), Company A and any of its 100% subsidiaries must have derived total assessable income of $200,000 or less in the 2017 income year, being the income year before the current year.

28. Company A earned $yy.00 assessable income in the 2017 income year. Consequently, paragraph 360-40(1)(c) is satisfied.

No Stock Exchange listing – paragraph 360-40(1)(d) ITAA 1997

29. In applying the requirements of paragraph 360-40(1)(d), Company A must not be listed on any Stock Exchange in Australia or a foreign country at the test time.

30. Company A was not listed on any Stock Exchange in Australia or a foreign country at either test time, so paragraph 360-40(1)(d) is satisfied.

CONCLUSION FOR EARLY STAGE TEST

31. Company A satisfies the early stage test for the 2018 income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.

THE ‘100 POINT TEST’ – paragraph 360-40(1)(e) and section 360-45

32. Company A has not provided sufficient evidence of satisfying the 100 point test under section 360-45 for the year ending 30 June 201X. For Company A to be a qualifying ESIC, it will need to satisfy the principles-based test.

THE ‘PRINCIPLES-BASED TEST’ – paragraph 360-40(1)(e) ITAA 1997

33. In a ruling for a previous period, the Commissioner concluded that Company A satisfied the principles based test in respect of the ‘service’ being developed. While the ‘service’ is still being developed, Company A will continue to satisfy the requirements of the principles based test, within subparagraphs 360-40(1)(e)(i) to (v).

34. Since the previous ruling was issued, Company A has completed integrations with Company B and Company C and now has the ability to provide various options.

35. For the 2018 financial year, Company A plans to integrate with other partners such as Company D, Company E, Company F, Company G and Company H, as well as various individual partners.

36. Company A are now collating additional information to be provided to its customers.

37. Company A have recently hired 2 additional full-time front-end developers to assist with the development of the ‘service’. Company A expect a usable prototype by XX 20XX and a completed product closer to YY 20YY.

CONCLUSION FOR PRINCIPLES BASED TEST

Company A satisfies the principles based test as it will satisfy the requirements within subparagraphs 360-40(1)(e)(i) to (v) for the period commencing 1 July 2017 until 30 June 2018, or the date when their ‘service’ has been fully developed and is ready for client use, whichever occurs earlier.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).