Edited version of private advice

Authorisation Number: 1051528599876

Date of advice: 20 June 2019

Ruling

Subject: Early stage innovation company

Question 1

Does the Acceleration Program offered by the Company meet the requirements of an accelerator program for the purposes of item 4 of the table in subsection 360-45 (1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

This ruling applies for the following period

1 July 2016 - 30 June 2021

The scheme commences on

1 July 2016

Relevant facts and circumstances

The Company is an Australian public company.

The Company is a platform for launching Start-ups.

The Company provides dedicated funding to Start-ups through a partnership Agreement (Agreement).

The Program is open to Companies.

If successful the Start-up will receive up to $X seed capital for X% equity.

There is a comprehensive selection process which a Start-up must met to be eligible for the Acceleration Program (Program). The program is competitive with only a fraction of applicants selected to join each cohort.

The Company has provided their Program for over six months and the first cohort has graduated.

The Program runs for X months.

The Program encompasses several topics with workshops included. These provide education and training on fundamental business topics.

Start-ups are introduced to partner organisations and investors.

The Program includes business coaching and introduction to Mentors. Start-ups are introduced to a selection of mentors throughout the program as well as accessing regular support from a business coach.

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

Question 1

Summary

The Company's Program meets the requirements of an accelerator program for the purposes of item 4 of the table in subsection 360-45(1).

Detailed reasoning

Eligible Accelerator Program

Under the 100-point innovation test used to determine if a company qualifies as an early stage innovation company (ESIC) in section 360-40, 50 points are available if a company has completed or is undertaking an eligible accelerator program (item 4 of the table in subsection 360-45(1)). The requirements of this test are that, at the test time:

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.

Accelerators are a relatively new type of organisation. Essentially, an accelerator is a type of organisation that assists new ventures by providing accelerator programs.

Accelerator programs are designed to help cohorts of new ventures with the venture process, which includes defining and building their initial products, identifying promising customer segments and securing resources (both capital and employees). They may be either for-profit or non-profit, but regardless, the programs usually provide a small amount of seed capital and working space. They offer significant networking, educational and mentorship opportunities with both peer ventures and mentors (who may be successful entrepreneurs, program graduates, venture capitalists, angel investors, or corporate executives).

Accelerator programs are of fixed term and limited-duration, typically running for three to six months. In the initial stages, the structure and content of the program is likely to be common across the cohort, before diversifying to a more customised and unstructured format tailored to the needs of the individual start-ups.

It is not sufficient for a program to simply meet the accepted definition of an accelerator program in order for startups that undertake the program to be eligible for 50 points. The program must also be an eligible accelerator program, as per item 4 of the table in subsection 360-45(1).

The Explanatory Memorandum (EM) to Tax Laws Amendment (Tax Incentives For Innovation) Bill 2016 provides guidance on what is considered an eligible accelerator program for the purposes of item 4 of the table in subsection 360-45(1) when it states at paragraph 1.95:

...An eligible accelerator programme is a programme that provides time-limited support for start-ups, for which an open, independent and competitive application process is required for entry, provided the entity running that programmehas been operating for at least a six month period and has provided a complete programme of this kind to at least one cohort of entrepreneurs.Accelerator programmes that cannot provide value adding support (mentorship, training, education and networks) to the accepted companies or have had no successful companies coming through the programme are unlikely to be effective accelerator programmes.

The EM guidance in conjunction with the law points to five factors that an accelerator program must satisfy to be considered an eligible accelerator program. These are:

                       i.       A merit-based screening process - Entry into an accelerator program must involve a merit-based screening process, where entry into the program is determined by an open, competitive validation process. Programs that offer entry based predominantly upon payment of a fee would not qualify.

                      ii.       The company, not an individual, must complete the program - In some instances it is the founder of a company that is registered to undertake an accelerator program. In order to satisfy the requirements of subsection 360-45(1) the company itself must receive certification upon completion of the program.

                     iii.       Time-limited support - The limited duration is the characteristic that most clearly defines accelerator programs. Generally speaking, a program will run for approximately 3 to 6 months.

                     iv.       Six month minimum period - The accelerator must have been providing accelerator programs for a minimum of 6 months at the test time (when the potential ESIC issues shares to the investor). This is not limited to the particular program being considered under the 100-point innovation test, but can include any accelerator program provided by the accelerator.

                      v.       Prior completion by a cohort of entrepreneurs - To qualify as an eligible accelerator program, at least one cohort of entrepreneurs must have completed either that particular program, or another program offered by the accelerator. The term 'cohort' refers to a group or batch and is not merely one or two entrepreneurs.

Application to your circumstances

For the purposes of this ruling the Company's' Program must satisfy two overarching requirements:

1. it is an accelerator program in accordance with the accepted definition; and

2.    it is an eligible accelerator program in accordance with item 4 of the table in subsection 360-45(1).

Accelerator Program

Accelerators have been identified as having five defining, partially interdependent features; seed funding, cohort based, co-location, a structured program and mentoring.

The Company's' Program fits some accepted characteristics of an accelerator program, being to assist cohorts of ventures to define and build their initial products.

Accelerators typically offer startups seed funding in exchange for a small proportion of equity. This is generally around 7.5% to 10% for a $20,000 to $50,000 cash investment, in addition to further in-kind value work $20,000 to $50,000. In this case the Company offers seed funding in exchange a X% stake in the equity. This condition is accepted.

Accelerators simultaneously invest in a cohort of start-ups. Entry is typically limited to 10 or fewer start-ups per cohort. The Company usually has a cohort made up of less than 10 per program.

It is often a requirement for startups to be collocated fulltime in the same space. This allows for economies of scale when sharing resources or specialists, and also facilitates peer interaction and learning. Participants in the Program gain access to a network of coworking spaces. Each start-up is allocated a permanent desk for each member of their team.

Accelerator programs are designed to help cohorts of new ventures with the venture process, which includes defining and building their initial products, identifying promising customer segments and securing resources (both capital and employees). They offer significant networking, educational and mentorship opportunities with both peer ventures and mentors. They are of a fixed term and limited duration, typically running for three to six months.

The Company offers a structured program to successful applicants. The Program has been designed to guide participants along the most efficient path for identifying and exploiting a market opportunity in the energy sector. The cohort based activities in this part of the program are also important for forming bonds between participants and facilitating peer learning. The program is designed to strike a balance between the different speeds of varied startups, and the efficiencies gained from sticking to a structured program. In this case the Program meets this requirement.

Mentors may be full time business development advisors, successful entrepreneurs, alumni of the program, volunteers, or seed fund investors. Mentors may be local and readily accessible, or remotely located with the ability to access overseas markets and partners. Every company in the Program is assigned a business coach who has successfully set up, grown and sold at least one business, furthermore there are regular meetings with the business coach throughout the Program to discuss the challenges fact startups and how to overcome them. The condition is therefore met.

As the Company's' Program fulfils the conditions as outlined in the accepted definition of accelerator program, the Commissioner turns his mind to the next requirement of whether The Company it is an eligible accelerator program in accordance with item 4 of the table in subsection 360-45(1).

Eligible Accelerator Program

Each of the five factors that an accelerator program must satisfied to be considered an eligible accelerator program in accordance with item 4 of the table in subsection 360-45(1) will be examined in turn.

1. Merit-based screening process

Entry into an accelerator program must involve a merit-based screening process, where entry into the program is determined by an open, competitive validation process. The Company has a detailed selection process, which is competitive. The entities that emerge out of these processes proceed to the Program.

This selection process does not offer entry based on payment of a fee. It is highly competitive and open to any applicant. The Company's selection of startups for its Program is a merit-based screening process.

2. The company, not an individual, must complete the program

It is accepted that companies and not individuals undertake and complete the Program.

3. Time-limited support

Generally, time-limited support will mean a program lasting between 3 to 6 months. The broadly accepted length is considered indicative only. It is designed to provide guidance rather than be a definitive rule.

The Company's Program meets the characteristic of providing time-limited support.

4. Six month minimum period

The Company has been running its Program for X years therefore meeting the requirement of having provided accelerator programs for a minimum period of six months.

5. Prior completion by a cohort of entrepreneurs

The Program has run several programs which cohorts have completed. Therefore there has been at least one cohort to complete the program. The Program meets the requirement that it have at least one cohort of entrepreneurs previously complete one of its accelerator programs.

Conclusion

The Company's Program is an accelerator program according to the accepted definition. In addition the program meets the features of an eligible accelerator program according to item 4 of the table in subsection 360-45(1).

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