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Edited version of your written advice
Authorisation Number: 1051212863050
Date of advice: 29 May 2017
Ruling
Subject: Qualification as an Early Stage Innovation Company
Subject: Early Stage Innovation Company
Question 1
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)?
Answer
Yes.
This ruling applies for the following periods:
1 July 2016 to 30 June 2017.
The scheme commences on:
1 July 2016.
1. The company was incorporated in Australia within the last six years and across the last three of those income years, it and its 100% subsidiaries incurred total expenses of less than $1,000,000.
2. The company has no subsidiaries and has expenses of less than $1,000,000 in the previous income year, i.e. the year ended 30 June 2016. It had assessable income of less than $200,000 for the same year.
3. Its equity interests are not listed for quotation in the official list of any stock exchange.
4. The company is developing an innovative product.
Information provided
1. The company has provided information in relation to the Innovation and as evidence of the R&D expenses and shareholdings.
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
Qualifying Early Stage Innovation Company
1. 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'
2. 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)
3. 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 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).
4. 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.
5. A company that does not meet any of these conditions will not qualify as an ESIC.
Total expenses - paragraph 360-40(1)(b)
6. 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)
7. 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)
8. 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
9. 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
10. The company has not provided any evidence of satisfying the 100 point test under section 360-45 for the year ending 30 June 2017.
'Principles-based test' - subparagraphs 360-40(1)(e)(i) to (iv)
11. 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.
12. 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.
13. 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.
Application to your circumstances
Test time
14. 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 2017.
Current year
15. For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 2017 (the 2017 income year). For clarity, in relation to particular requirements within subsection 360-40(1), the last three income years will include the years ending 30 June 2017, 2016 and 2015, and the income year before the current year will be the year ending 30 June 2016 (the 2016 income year).
Early stage test
Incorporation or Registration - paragraph 360-40(1)(a)
16. The was incorporated within the last 6 income years, and across the last three of those income years, it and its 100% subsidiaries incurred total expenses of $1 million or less, subparagraph 360-40(1)(a)(i) is satisfied.
Total expenses - paragraph 360-40(1)(b)
17. As the company had expenses less of than $1,000,000 in the prior income year, paragraph 360-40(1)(b) is satisfied.
Assessable income - paragraph 360-40(1)(c)
18. As the company's assessable income for the prior income year is less than $200,000 and paragraph 360-40(1)(c) is satisfied.
No stock exchange listing - paragraph 360-40(1)(d)
19. As the company 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
20. The company will satisfy the early stage test for the entire 2017 income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.
Principles based test
21. The company satisfies the principles based test as it satisfies the requirements within subparagraphs 360-40(1)(e)(i)to (v) for the period commencing 1 July 2016 until 30 June 2017 or the date when the product has been fully developed and is ready for sale, whichever occurs earlier.
Conclusion
22. The company meets the eligibility criteria of an ESIC under section 360-40 for the period commencing 1 July 2016 until the earlier of 30 June 2017 or the date when the innovation has been fully developed and is ready for sale, whichever occurs earlier.