Edited version of private advice

Authorisation Number: 1051680249804

Date of advice: 15 May 2020

Ruling

Subject: Early stage innovation company status

Question 1

Will Company A obtain 50 points under item 5 of the table in subsection 360-45(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if they received an investment of at least $50,000 from a developer for shares in Company A?

Answer

Yes. Company A will obtain 50 points from the time a developer has paid them at least $50,000 for the shares issued by Company A. These points apply to shares that are issued at least a day after the developer had their shares issued.

Question 2

By entering into the Agreement with Entity A, will Company A obtain 25 points under item 7 of the table in subsection 360-45(1) of the ITAA 1997)?

Answer

Yes. Company A will obtain 25 points from when the Agreement is executed.

Question 3

By entering into the Agreement with Entity A, will Company A obtain 25 points under item 8 of the table in subsection 360-45(1) of the ITAA 1997)?

Answer

Yes. Company A will obtain 25 points from when the Agreement is executed.

Question 4

If the answers to Questions 1, 2 and 3 are yes, does Company A meet the criteria of an Early Stage Innovation Company (ESIC) under subsection 360-40(1) of the ITAA 1997?

Answer

Yes. Company A will qualify as an ESIC from the date all of the points are obtained under items 5, 7 and 8 of the 100 point innovation test.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company A was incorporated in Australia on Date X. Its equity interests are not listed for quotation in the official list of any stock exchange.

Company A has no subsidiaries and as it was incorporated in the year ended 30 June 2020 it has no income or expenses in the previous income year, i.e. the year ended 30 June 2019.

Company A intends to enter into the Agreement with Entity B to co-develop a product for market.

A copy of the draft Agreement was provided.

Company A is also looking to acquire rights from Entity B. As part of the negotiations it is looking to offer Entity B equity interest by way of shares in Company A for a payment of $50,000.

Entity B is not currently an associate of Company A.

We referred to the relevant information within the documents provided with the in applying the relevant tests to Company A's circumstances.

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 360-45(1)

Income Tax Assessment Act 1936 subsection 318(2)

Reasons for decision

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

Question 1

Summary

Company A will obtain 50 points under item 5 of the table in subsection 360-45(1) when they received an investment of at least $50,000 from Entity B for shares in Company A.

However, the points will only apply to shares issued at least a day after Company A has issued the shares to Entity B.

Detailed reasoning

50 points are obtained by a company under item 5 of the table in subsection 360-45(1) where:

               i.         a total of at least $50,000 has been paid for equity interests that are shares in the company;

              ii.        the company issued those shares to one or more parties that were not associates of the company immediately before the issue of those shares;

             iii.        to one or more of those parties the parties did acquire those shares primarily to assist another entity become entitled to a tax offset (or a modified CGT treatment) under Subdivision 360-A; and

             iv.        the company issued those shares at least one day before the test time.

At least $50,000 has been paid for equity interests that are shares in the company

Entity B will pay at least $50,000 for shares in Company A. Company A has stated that the shares will be a share in the capital of Entity B.

Parties that were not associates of the company immediately before the issue of those shares

An associate of a company is defined under subsection 318(2) of the Income Tax Assessment Act 1936.

Examples of entities that would be an associate of a company include:

·         a partner of the company or a partnership in which the company is a partner

·         a trustee of a trust estate under which the company or associate benefits

·         another entity (including a person) that, acting alone or with another entity or entities, sufficiently influences the company

·         an entity (including a person) that, either alone or together with associates, holds a majority voting interest in the company

·         a second company that is sufficiently influenced by the company or the company's associates

·         a second company in which a majority voting interest is held by the company or the company's associates.

As stated in the facts Entity B will not be an associate. If Entity B took up the offer to acquire the shares, then they will not have been an associate immediately prior to the shares being issued.

Acquire those shares primarily to assist another entity become entitled

Entity B is being offered shares as an opportunity to participate in the potential success of the project that they will be a part of.

It could not be concluded that in agreeing to participate in the potential success of the project by acquiring shares that Entity B's primary purpose in acquiring those shares was to give other investors who subsequently buy shares access to the offset.

The company issued those shares at least one day before the test time

This looks at the shares issued to Entity B. Any shares issued to investors have to be issued at least a day after Company A issues the shares to Entity B.

Conclusion Item 5

Company A will obtain 50 points under item 5 when Entity B pays Company A $50,000 for their shares. However, these points only apply to shares that are issued at least a day after the shares, that the Entity B paid $50,000 to acquire, were issued to Entity B.

Question 2

Summary

Company A will obtain 25 points under item 7 of the table in subsection 360-45(1) once they have entered into the Agreement with the Entity A.

Detailed reasoning

25 points are obtained by a company under item 7 of the table in subsection 360-45(1) where the company has rights (including a licence) on an innovation through either

               i.         an innovation patent granted and certified in Australia in the last five years;

              ii.        a registered design registered in Australia in the last five years; or

             iii.        an equivalent right granted in another country.

Under the Agreement Company A received a licence to an innovation patent owned by Entity A.

That patent was granted in year x which is within the last 5 years.

Company A will obtain 25 points from the date of execution of the Agreement.

Therefore, for the year ended 30 June 20XX these points could be applied in examining shares being issued after the date of execution until 30 June 20XX.

Question 3

Summary

Company A will obtain 25 points under item 8 of the table in subsection 360-45(1) once they have entered into the Agreement with the Entity A.

Detailed reasoning

25 points are obtained by a company under item 8 of the table in subsection 360-45(1) where the company has a written agreement with

               i.         an institution or body listed in Schedule 1 to the Higher Education Funding Act 1988 (about institutions or bodies eligible for special research assistance); or

              ii.        an entity registered under section 29A of the Industry Research and Development Act 1986 (about research service providers);

             iii.        to co-develop and commercialise a new, or significantly improved, product, process, service or marketing or organisational method.

Entity A is an entity that meets on of the conditions in I or ii above.

Under the Agreement both Company A and Entity B will be involved in developing the product which will be commercialised by Company A.

Information provided in the application demonstrates that what is being co-developed is 'a new, or significantly improved, product, process, service or marketing or organisational method'.

Question 4

Summary

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

Detailed reasoning

Qualifying Early Stage Innovation Company

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'

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)

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 A nd 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).

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.

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

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

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)

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)

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

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.

Application to your circumstances

Test time

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 20XX.

Current year

For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 20XX (the 20XX income year). For clarity, in relation to the requirements within subsection 360-40(1), the last three income years will include the years ending 30 June 20XX, 20XX and 20XX, and the income year before the current year will be the year ending 30 June 20XX (the 20XX income year).

Early stage test

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

As Company A was incorporated on Date X, which is within the last 3 income years, subparagraph 360-40(1)(a)(i) is satisfied.

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

As Company A was incorporated in the current income year it had no expenses in the prior income year and paragraph 360-40(1)(b) is satisfied.

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

As Company A was incorporated in the current income year it had assessable income in the prior income year and paragraph 360-40(1)(c) is satisfied.

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

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

Conclusion on early stage test

Company A will satisfy the early stage test for the entire 2020 income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.

100-point test

As concluded in our reasons for Question 1, Company A can apply 50 points under item 5 of table in subsection 360-45(1) at least a day after the shares are issued by Company A to Entity B.

As concluded in our reasons for Question 2, Company A can apply 25 points under item 7 of table in subsection 360-45(1) from when they have executed the draft Agreement.

As concluded in our reasons for Question 3, Company A can apply 25 points under item 8 of table in subsection 360-45(1) from when they have executed the draft Agreement.

Once Company A can apply all three set of points, which will either be the later of date the Agreement is executed or Entity B has paid $50,000 for the shares that have been issued to them, Company A will have passed the 100 point innovation test under section 360-45.

Conclusion

Company A meets the eligibility criteria of an ESIC under section 360-40 from when they can apply the points under items 5, 7 and 8 the table in subsection 360-45(1) until 30 June 2020.

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