Edited version of your written advice

Authorisation Number: 1051195207072

Date of Advice: 27 February 2017

Ruling

Question 1

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) on Date X?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

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

Company A has no subsidiaries and declared total expenses at Label Q of its company tax return for the year ending 30 June 2016 as being Amount A.

Company A declared its total income at Label S of its company tax return for the year ending 30 June 2016 as being Amount B.

Company A completed a share placement on Date X which was in the year ended 30 June 2017.

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

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Act 1939 subsection 6(1)

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Summary

Company A does not meet the eligibility requirements of an ESIC under subsection 360-40(1) immediately after Date X as it's assessable income for the year ended 30 June 2016 was more than the limit of $200,000 or less.

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:

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 (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.

Total expenses is not a defined term and in respect of total expenses paragraph 1.64 of the Explanatory Memorandum to the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 ('EM') states:

The ATO's company tax return requires companies to report 'total expenses' at item six as part of the total profit or loss calculation. A company that has submitted a company tax return in the previous income year must rely on the amount reported in item six for the purposes of this test. Alternatively, if the company was not required to submit a company tax return, it may use the amount corresponding to this item.

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.

Assessable income is defined in subsection 6(1) of the Income Tax Assessment Act 1936 to have the meaning given by subsection 995-1(1).

Assessable income in subsection 995-1(1) has the meaning given by sections 6-5, 6-10, 6-15, 17-10 and 17-30.

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.

Application of the early stage test to your circumstances

Test time

For the purposes of this ruling, the test time for determining if Company A is a qualifying ESIC is immediately after Date X.

Current year

For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 2017 and the income year before the current year will be the year ending 30 June 2016.

Early stage test

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

As Company A was incorporated on Date A 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 declared expenses of $1 million or less in item 6 of their 2016 income tax return paragraph 360-40(1)(b) is satisfied.

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

Amount A would be assessable income as defined under section 6-5.

As this exceeded $200,000 paragraph 360-40(1)(c) is not 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, subparagraph 360-40(1)(a)(d) is satisfied.

Conclusion on early stage test

Company A will not satisfy the early stage test for the 2017 income year, as not all of the requirements within paragraphs 360-40(1)(a) to (d) were satisfied.