Edited version of private advice

Authorisation Number: 1051802925521

Date of advice: 05 February 2021

Ruling

Subject: Early stage innovation company

Question

Does the Company meet the criteria of an Early Stage Innovation Company (ESIC) under subsection 360-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997) at the Test Time identified in this private ruling application?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 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. The Company was incorporated in Australia on Date X. Its equity interests are not listed for quotation in the official list of any stock exchange.
2. In the previous income year, The Company had expenses of $X and assessable income of $X.
3. The Company is developing a product and information that details its development was provided.

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

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

Question 1:

Summary

The company 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, before the current year, 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).

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.

'100-point test' - paragraph 360-40(1)(e) and section 360-45

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 (v)

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.

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.

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

      I.        the company must be genuinely focused on developing one or more new or significantly improved innovations for commercialisation

    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.

Not a foreign company - paragraph 360-40(1)(f)

To meet the requirement in paragraph 360-40(1)(f), the company must not be a foreign company within the meaning of the Corporations Act 2001.

Application to your circumstances

Test time

For the purposes of this ruling, the test time for determining if The Company 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 For clarity, in relation to particular requirements within subsection 360-40(1).

Early stage test

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

The Company was incorporated within the last 3 income years, subparagraph 360-40(1)(a)(i) is satisfied.

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

As the Company had expenses of less than $1 million in the prior income year, paragraph 360-40(1)(b) is satisfied.

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

As the Company's assessable income for the prior income year is less than $200,000 paragraph 360-40(1)(c) is satisfied.

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

As the Company 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

The Company will satisfy the early stage test for the entire 20XX income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.

Principles based test

Genuinely focussed on developing new or significantly improved innovations for commercialisation - subparagraph 360-40(1)(e)(i)

According to The Company, its product will be the first to offer such a product and service in its selected market.

The Company has taken a number of steps in developing their product, including:

•         market research domestically and abroad

•         engaging with a number of third parties, and

•         trials.

Details of the commercialisation strategy were provided.

Conclusion on subparagraph 360-40(1)(e)(i)

The Company is genuinely focussed on developing its product for a commercial purpose. The product will be a new product when compared to what is currently available in the target market.

Therefore, subparagraph 360-40(1)(e)(i) will be satisfied for the time period from 1 July 20XX until 30 June 20XX or the date when fully developed, whichever occurs earliest. Once fully developed, The Company will no longer be 'developing' for commercialisation and subparagraph 360-40((1)(e)(i) will no longer be satisfied.

High growth potential - subparagraph 360-40(1)(e)(ii)

The Company provided details of its predicted growth and based on that information subparagraph 360-40(1)(e)(ii) will be satisfied.

Scalability - subparagraph 360-40(1)(e)(iii)

The Company's business model provided illustrates the increased income. The information provided also shows that the Company has the potential to successfully scale up its business. Therefore, subparagraph 360-40(1)(e)(iii) will be satisfied.

Broader than local market- subparagraph 360-40(1)(e)(iv)

The Company has demonstrated they have the potential to address a broader market than just the local market, including international markets. Therefore, subparagraph 360-40(1)(e)(iv) will be satisfied.

Competitive advantages - subparagraph 360-40(1)(e)(v)

Being the first to offer such a service, The Company demonstrated the potential for their product to have competitive advantages within the target market, satisfying subparagraph 360-40(1)(e)(v).

Conclusion on principles test

While the Company is still developing their product, they will continue to satisfy the principles-based test.

Not a foreign company - paragraph 360-40(1)(f)

The Company is not a foreign company within the meaning of the Corporations Act 2001.

Conclusion

The Company meets the eligibility criteria of an ESIC under section 360-40 for the period commencing 1 July 20XX until the earlier of 30 June 20XX or the date when their product has been fully developed and is ready for sale, whichever occurs earlier.

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