Edited version of private advice

Authorisation Number: 1052271829726

Date of advice: 31 July 2024

Ruling

Subject: Eligible accelerator program

Question

Is the commercialisation program run by X Co 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?

Answer

Yes.

This ruling applies for the following periods:

1 July 2023 to 30 June 2024

1 July 2024 to 30 June 2025

1 July 2025 to 30 June 2026

1 July 2026 to 30 June 2027

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

X Co. specialises in the commercialisation of research from individuals, universities and other research institutions.

X Co provides assistance to developers of innovations through a 12-month commercialisation program, focussing on particular areas of innovation, such as environmental, social and governance enabling technologies. The program is offered to a number of participants at a time.

X Co has been offering its commercialisation program since its incorporation on xxxx and has completed several rounds of the program.

Main features of the program

The program provides a range of support services to participants with the aim of increasing the participants' likelihood of commercial success. It is tailored to each participant's particular circumstances and stage of development, and consists of an intensive program with a two-stage component.

The first stage involves the provision of business planning and strategy assistance. The second stage involves investment planning and preparation.

These stages are conducted over the course of 9 months. In the following 3 months of the program, the participants are provided formal support, at this latter stage requiring less interaction with X Co staff.

After the formal program ends, X Co continues to provide ongoing support to participants on an "as needs" basis through, for example, advice strategy sessions; introductions to relevant service providers; and the provision of assistance with capital raising.

Participants in the program

X Co has a dedicated personnel who are in regular contact with universities and research institutions, searching for the best ideas and innovations which are ready for commercialisation.

Once potential participants have been identified, X Co's scientific panel carries out a technical analysis of each potential innovation. X Co also conducts a technical review of the innovation, relevant Intellectual Property landscape mapping, and validates the markets and commercial opportunities in respect of the innovation. Recommendations are then given to the selection committee for acceptance into the program.

The selection process does not include any application fee and is independent of the process of seeking investors who fund the program.

The majority of applications to participate in the commercialisation program are researchers.

Most applicants come from universities and other research organisations, with applications open to other innovators. All applicants evaluated under the same process.

Once selected, the participants form companies as part of the commercialisation process.

Investors

Prior to the commencement of each program, X Co attracts a pool of investors, who fund the operation of the program in return for an equity interest in each of the participant companies. An investment entity related to X Co also takes up an equity position in each of the participant companies.

The selection of potential participants is not based on the equity interest which could be obtained by the initial investors, and the X Co related investment entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 subsection 360-45(1)

Does IVA apply to this private ruling?

No.

Reasons for decision

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.

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. 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 ordinary 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).

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 programme has 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:

•         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.

•         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.

•         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.

•         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.

•         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 X Co's circumstances

In order to be considered 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, X Co's commercialisation program must satisfy two requirements:

•         it must be an accelerator program in accordance with the ordinary definition; and

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

Accelerator Program

Accelerators are organisations that offer a range of support services and funding opportunities for start-ups. It is accepted that X Co's program meets all of the major defining characteristics of what is regarded as an accelerator program for the following reasons:

•         X Co's program provides a range of support services to participants including business planning, introduction to key contacts, and access to funding, with the aim of increasing the participants' likelihood of commercial success.

•         The program assists participants to build process and company structure, and provides supports to rapidly commercialise and scale innovations, research and ideas.

•         The program assists early stage start-up companies by offering mentorship, assistance with business development and investment, planning and preparation, and business networking.

•         Participants are also introduced to relevant service providers, and strategy sessions and assistance with capital raising on a needs basis.

The features of the program fits with the accepted characteristics of an accelerator program, being to assist cohorts of new ventures to define and build their initial products, to identify promising customer segments and to secure required resources.

Eligible Accelerator Program

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

X Co has dedicated personnel who are in regular contact with universities and research institutions, searching for the best ideas and innovations which are ready for commercialisation.

Whilst most applicants come from universities and other research organisations, other innovators may apply, and will be evaluated under the same process.

The screening process is merit-based for the following reasons:

•         selection to the program involves both a technical and commercial analysis of the potential participants' innovation, which includes a technical review of the innovation, Intellectual Property landscape mapping, and a validation of markets and opportunities, before the recommendation of a select number of applicants to participate in the program.

•         The selection process does not offer entry based on payment of a fee and is independent of processes to procure investors to fund the program.

The company, not an individual, must complete the program

The X Co commercialisation program is open for companies to apply.

Most applications to participate in the commercialisation program are individual researchers, who once selected, form companies as part of the commercialisation process.

It must be noted that the requirements of item 4 of the table in subsection 360-45(1) will not be met if an individual alone (and not a company) completes the X Co program.

Time-limited support

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

The X Co's commercialisation program generally involves an intensive 9-month program, then an additional 3 months of formal support, depending on the needs of the participant. This is sufficiently short enough and intensive enough that the success or failure of the participants' innovations are accelerated.

Therefore, the X Co program meets the characteristic of providing time-limited support.

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).

The X Co commercialisation program delivered by X Co has been operating since xxxx and has delivered a number of cohort programs.

It therefore meets the requirements of having provided an accelerator program for a minimum period of six months.

Prior completion by a cohort of entrepreneurs

The X Co commercialisation program has been operating since xxxx and has delivered a number of cohort programs.

It therefore meets the requirement that it has at least one cohort of entrepreneurs previously complete its accelerator program.

Conclusion

X Co's commercialisation program is an accelerator program according to the ordinary 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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