Edited version of private advice

Authorisation Number: 1051792659869

Date of advice: 22 December 2020

Ruling

Subject: Early stage innovation company

Question

Does Company A 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 period:

1 July 2020 to 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

Company A is an Australian company incorporated during the year ending 30 June 2021.

Company B is a 100% subsidiary of Company A.

Company B has developed a xx container which is being trialled with several of its potential customer and stakeholder contacts.

Company A is not listed on any Australian stock exchange.

Company A did not receive any assessable income for the year ended 30 June 2020.

Company A did not incur any expenditure for the year ended 30 June 2020

Company A received an Accelerating Commercialisation Grant of $XX during the year ending 30 June 2021 under the programme administered by the Commonwealth known as the Entrepreneurs Programme.

Company A has self-assessed as an ESIC using the 100 point test.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 360-40(1)

Income Tax Assessment Act 1997 paragraph 360-40(1)(a)

Income Tax Assessment Act 1997 paragraph 360-40(1)(b)

Income Tax Assessment Act 1997 paragraph 360-40(1)(c)

Income Tax Assessment Act 1997 paragraph 360-40(1)(d)

Income Tax Assessment Act 1997 paragraph 360-40(1)(e)

Income Tax Assessment Act 1997 subparagraph 360-40(1)(e)(i)

Income Tax Assessment Act 1997 subparagraph 360-40(1)(e)(ii)

Income Tax Assessment Act 1997 subparagraph 360-40(1)(e)(iii)

Income Tax Assessment Act 1997 subparagraph 360-40(1)(e)(iv)

Income Tax Assessment Act 1997 subparagraph 360-40(1)(e)(v)

Income Tax Assessment Act 1997 section 360-45

Reasons for decision

Summary

Company A is an Early Stage Innovation Company (ESIC) for the year ending 30 June 2021, having met the eligibility requirements under subsections 360-40(1) and 360-45(1).

Detailed reasoning

Subsection 360-40(1) outlines the criteria for a company to qualify as an ESIC at a particular time in an income year.

The criteria are based on a series of tests to identify if the company is at an early stage of its development and is developing new or significantly improved innovations to generate an economic return.

A company qualifies as an ESIC if it satisfies the early stage test and one of two 'innovation' tests which are the 100-point innovation test or the principles-based innovation test.

Early stage test

The early stage test requirements are specified in paragraphs 360-40(1)(a) to (d) and are outlined below.

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:

• incorporated in Australia within the last three income years (the latest being the current year); or

• 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

• registered in the Australian Business Register 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, it must also satisfy one of two innovation tests being:

1. The objective (100 point) test; or

2. The principles based test.

Company A has stated that it seeks this Ruling in relation to the objective (100 point) test.

Application of subsections 360-40(1) and 360-45(1) to Company A

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 2021.

Current year

For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 2021 (the 2021 income year).

For clarity, in relation to particular requirements within subsection 360-40(1), for the 2021 income year the last three years will include the years ending 30 June 2021, 2020 and 2019. The income year before the current year will be the year ending 30 June 2020 (the 2020 income year).

Early stage test

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

Company A was incorporated during the year ending 30 June 2021 which is within the last three income years, therefore paragraph 360-40(1)(a) is satisfied.

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

Company A incurred no expenses in the prior income year (i.e. the 2020 income year). As the total expenses incurred in the prior income year were less than $1 million paragraph 360-40(1)(b) is satisfied.

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

Company A had assessable income of $275,000 (from grant funding) which is less than $200,000 (excluding grant funding) in the prior income year (i.e. the 2020 income year). Paragraph 360-40(1)(c) is satisfied.

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

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

Conclusion on early stage test

Company A satisfies the early stage test for the 2021 income year as each of the requirements in paragraphs 360-40(1)(a) to (d) have been satisfied.

100 point innovation test The 100 point test in paragraph 360-40(1)(e) requires the company to have at least 100 points under section 360-45.

Item 2 of the 100 point innovation test in subsection 360-45(1)

75 points are obtained by a company under item 2 of the table in subsection 360-45(1) where:

The company has received an Accelerating Commercialisation Grant under the program administered by the Commonwealth known as the Entrepreneurs ' Programme.

Conclusion Item 2

Company A obtained 75 points when it received an Accelerating Commercialisation Grant of $XX during the year ending 30 June 2021 under the programme administered by the Commonwealth known as the Entrepreneurs Programme.

Item 4 of the 100 point innovation test in subsection 360-45(1)

50 points are obtained by a company under item 4 of the table in subsection 360-45(1) where:

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.

Conclusion Item 4

Company A has answered "yes" to the above and so has obtained 50 points under Item 4 of the table in subsection 360-45 (1).

Conclusion

Company A satisfies each paragraph of subsection 360-40(1). Therefore, Company A meets the eligibility criteria of an ESIC for the period commencing 1 July 2020 until 30 June 2021.

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