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Edited version of private advice

Authorisation Number: 1051714235063

Date of advice: 13 July 2020

Ruling

Subject: Eligible accelerator program

Question

Does the accelerator program delivered by the Company meet the requirements of an eligible 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')?

Answer

Yes

This ruling applies for the following periods:

1 July 20XX to 30 June 20YY

1 July 20YY to 30 June 20ZZ

1 July 20ZZ to 30 June 20AA

1 July 20AA to 30 June 20BB

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    The accelerator program delivered by the Company has been operating since 20WW and has delivered two cohort programs, including the current program which commenced in 20XX.

2.    The accelerator program is a time-limited program, designed to support a cohort of competitively selected start-ups in a particular industry.

3.    The accelerator program is a free offering, marketed widely across social media platforms and the Company's website.

4.    Candidates undergo a competitive selection process.

5.    Upon selection to join the accelerator program, each participating early stage company will be made a formal offer to join the program, including a written agreement.

6.    The accelerator program offers mentorship, a series of workshop and education topics, and business networking. Additionally, the program provides participants with rent-free access to a dedicated co-working space.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 Section 360-45

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise indicated.

Summary

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

Detailed reasoning

Eligible Accelerator Program

  1. 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 (table item 4 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.

  1. Accelerators are a relatively new type of organisation. Essentially, an accelerator is a type of organisation that assists new ventures by providing accelerator programs.
  2. 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).
  3. 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.
  4. It is not sufficient for a program to simply meet the accepted definition of an accelerator program in order for start-ups 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).
  5. 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.

  1. 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

  1. For the purposes of this ruling, the Company's accelerator program must satisfy two overarching requirements:

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

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

Accelerator Program

  1. Accelerators are organisations that offer a range of support services and funding opportunities for start-ups.
  2. The Company's accelerator program for new ventures is designed specifically to support a cohort of competitively selected start-ups in a particular industry to accelerate their progress towards market launch.
  3. The program assists early stage start-up companies by offering mentorship, a series of workshop and education topics, and business networking.
  4. On an as needs basis, participants are also introduced to a network of venture capitalists, angel investors and other start-up ecosystem partners.
  5. The accelerator program provides each cohort with dedicated co-working space.

20.  This purpose clearly fits with the accepted characteristics of an accelerator program, being to assist cohorts of new ventures to define and build their initial products and identify promising customer segments.

  1. It is accepted that the Company's accelerator program meets all of the major defining characteristics of what is regarded as an accelerator program.

Eligible Accelerator Program

  1. Each of the five factors that an accelerator program must satisfy 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.

Merit-based screening process

  1. The application process to the accelerator program is publicly promoted via social media forums and publicly accessible via the Company's website.
  2. Start-ups can choose to enter a competitive process to gain placement in the program.
  3. The selection process does not offer entry based on payment of a fee, nor does the Company solicit any contribution in-kind or equity stake in the application or review process.

The company, not an individual, must complete the program

  1. The accelerator program is open to companies to apply.
  2. It must be noted, however, that instances where an individual alone (and not a company) completes the accelerator program, the requirements of table item 4 in subsection 360-45(1) will not have been met.

Time-limited support

  1. Generally, time-limited support will mean a program lasting between 3 to 6 months. The accelerator program is completed within this timeframe.
  2. During the program, the participants receive time-limited support in the form of training, mentoring, education, access to subject-matter experts and the broader range of the Company's networks on an as needed basis.
  3. Therefore, the accelerator program meets the characteristic of providing time-limited support.

Six-month minimum period

31.  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).

32.  The Company's first accelerator program commenced in 20WW.

33.  The Company meets the requirements of having provided an accelerator program for a minimum period of six months.

Prior completion by a cohort of entrepreneurs

  1. The Company has run its accelerator program since 20WW. There have been a number of cohort programs.
  2. The Company meets the requirement that it has at least one cohort of entrepreneurs previously complete its accelerator program.

Conclusion

The Company's accelerator 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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