Edited version of your written advice

Authorisation Number: 1051238644660

Date of advice: 19 June 2017

Ruling

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 period

1 July 201X to 30 June 201Y

The scheme commences on

1 July 201X

Relevant facts and circumstances

The Company

1. The Company was incorporated in Australia in the prior income year. It is a private company with none of its equity interests listed on any stock exchange.

2. The Company has one 100% owned subsidiary. The assessable income for The Company and its subsidiary for the prior income year was less than $200,000. The total expenses that were incurred by The Company and its 100% owned subsidiaries were less than $1m for the prior income year.

3. The Company has developed an application to serve the Australian labour market.

4. The Company is seeking further investment from third parties to further develop The Application.

The Application

5. The Company first received revenue on in early 201Y.

6. The Company generates revenues through The Application by charging a fee to use the platform.

7. They are now focussing on the next period of the business's growth. The Company is aiming to rapidly increase the use of The Application.

8. The applicable addressable market is the Australian employment labour market. While there are other competitors operating within this market, you maintain that The Application differs from existing products and services in the addressable market.

9. The taxpayer states that The Application is a new or significantly improved product for the addressable market for a number of reasons, including, but not limited to, the following:

● The Application is a mobile based application

● The target market is the Australian labour market

● Popular practices are being utilised within The Application.

10. In the future, The Company intends to introduce a number of additional features to the platform, which will make it unique.

11. The Company is continuing to develop The Application and is attempting to hire developers to develop The Application to its next version, which The Company expects will be their commercial product.

12. The majority of the upcoming capital raise will be used as wages for the developers of The Application until the next version of the commercial product is ready for release. Subsequent to this, another capital raise will be had to fund commercial/marketing activities for The Application.

Competitive advantages

13. The Company believes that its completed commercial platform will have an advantage in that there are no other similar products that operate in the Australian market and it will be the first in the world to offer the full functionality as they have described and these will continue to keep it ahead of the competition.

14. The Company has specifically stated that The Application is afforded competitive advantages including, but not limited to, the following:

● It has a product tailored to its addressable market.

● It provides flexibility in modes of its use.

● The Application is designed to be able to function as enterprise-level software including features to suit teams or individuals, and access control.

● The Application can reduce advertising costs, time to hire, and labour resources used in its target demographic.

Information provided

15. This ruling relies on the information provided by the applicant.

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. Broadly, 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. It is considered that a company will satisfy the incorporation test in subparagraph 360-40(1)(a)(i) where, immediately after the issue of shares to the investor, the company had been incorporated in either:

● that part of the current year which precedes the issue of shares; or

● one of the two income years prior to that year

6. A company that does not meet any of these conditions will not qualify as an ESIC.

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

7. 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)

8. 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)

9. 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

10. 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

11. 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 (iv)

12. 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.

13. 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.

14. 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 for commercialisation one or more new or significantly improved, products, processes, services or marketing or organisational methods

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.

Developing new or significantly improved innovations for commercialisation

15. For the purposes of Subdivision 360-A, an innovation is considered to be a new or significantly improved product, process, service, marketing or organisational method.

16. The innovation being developed by the company must either be new or significantly improved for an applicable addressable market. The company's addressable market is the revenue opportunity or market demand arising from the innovation or the related business. The addressable market must be objective and realistic.

17. Improvements must be significant in nature to meet this requirement. Customising existing products or minor changes resulting from software updates, pricing strategies or seasonal changes are examples of improvements that would not be considered significant.

18. The company must be genuinely focused on developing the innovation for a commercial purpose in order to generate economic value and revenue for the company. This requirement draws the distinction between simply having an idea and commercialising an idea.

19. 'Commercialisation' includes a range of activities that involve the implementation or sale of a new or significantly improved innovation that will directly lead to the generation of economic value for the company.

High growth potential

20. The company must be able to demonstrate that it has the potential for high growth within a broad addressable market. This refers to the company's ability to rapidly expand its business. Companies that are limited to supplying local customers will not meet this requirement.

Scalability

21. The company must be able to demonstrate that it has the potential to successfully scale up the business. The company must have operating leverage, where as it increases its market share or enters into new markets, its existing revenues can be multiplied with a reduced or minimal increase in operating costs per unit.

Broader than local market

22. The company must be able to demonstrate that it has the potential to address a market that is broader than a local city, area or region. The company does not need to have a serviceable market at a national, multinational or global scale at the test time. However, it does need to show that the business is capable of addressing a market that is broader than a local market and that the business can be adapted to a broader scale in the future.

Competitive advantages

23. The company must be able to demonstrate that it has the potential to have competitive advantages, such as a cost or differential advantage over its competitors which are sustainable for the business as it expands. The company can analyse what competitors in the market offer, and consider whether the company has a differentiating advantage that would allow it to outperform these competitors.

Application to your circumstances

Test time

24. For the purposes of this ruling, the test time for determining if The Company is a qualifying ESIC will be a particular date on or after 1 July 201X, but before 30 June 201Y.

Current year

25. For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 201Y (the 201Y income year). For clarity, in relation to particular requirements within subsection 360-40(1), the income year before the current year will be the year ending 30 June 201X (the 201X income year).

Early stage test

26. The Company was incorporated within the last three income years. The Company and its subsidiaries incurred expenses of less than $1 million and generated assessable income of less than $200,000 during the income year ending 30 June 201X. The Company is privately owned and none of its equity interests are listed on any stock exchange.

27. The Company will satisfy the early stage test for the 201Y income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.

100 point test

28. The Company does not meet the 100 point test under section 360-45 for the year ending 30 June 201Y. Thus, for The Company to be a qualifying ESIC it will need to satisfy the principles-based test.

Principles based test

Developing new or significantly improved innovation for commercialisation - subparagraph 360-40(1)(e)(i)

29. The Application is a mobile based employment seeking platform.

30. However, there is not, in the addressable market, a service that offers the complete offering that is offered by The Application. As described in the facts, The Application is innovative in that it has uniquely utilised the combination of the features mentioned in the facts to offer a new product, or a significant improvement on existing products.

31. Based upon the above facts, The Application is a new or significantly improved product compared to current services offered in its addressable market. For clarification, the Commissioner also considers that the planned development of The Application as described in the facts is more than just a customisation of an existing product or a minor extension and will result in a significantly improved product. Thus, The Company is still currently developing a new or significantly improved product for the addressable market for the purposes of subparagraph 360-40(1)(e)(i).

Genuinely focussed on developing for commercialisation

32. The activities and achievements already undertaken reached by The Company include:

a. the design and development of the mobile application, and

b. deployment of the mobile application into the market.

33. The Company will undertake a number of future activities to continue developing The Application with the goal of increasing the customer base.

34. The Application is already in use by the public and appears to have been successfully deployed. However, the initial version released for public use is continuing to be developed as described in the facts. It is evident by the initial release and monetisation of The Application that the product was, and is being, developed for commercialisation.

35. The above facts demonstrate that The Company is taking tangible steps to lead to the development and further commercialisation of their platform. Although the initial product may be available for use, the Commissioner considers that the planned developments are more than just a customisation of an existing product or a minor extension and will result in a significantly improved product for commercialisation.

36. The Company is planning to raise capital to generate funds to use to develop The Application to its next iteration and for the marketing and advertising of The Application.

37. Given the above, the Commissioner considers that The Company is genuinely focussed on developing The Application for commercialisation.

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

38. The Company is genuinely focussed on developing for commercialisation a new platform for the employment market. Therefore, subparagraph 360-40(1)(e)(i) will be satisfied for the year ending 30 June 201Y

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

39. The Application has already gained significant traction and current trends indicate this will continue to improve. The Company is currently developing The Application to be more scalable i.e. to be able to handle heavy usage by many users at once.

40. The Company hopes that adoption of The Application will be widespread.

41. The Company has developed The Application themselves.

42. Given their online presence, The Company may be able to quickly increase revenues through increased use of their platform.

43. Therefore, subparagraph 360-40(1)(e)(ii) will be satisfied.

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

44. The Company projections illustrate an increase in projected sales. The Application is internet based which allows for a global market and will allow for an increase in sales without proportionately increasing direct sales costs.

45. The Application is currently being developed to be scalable i.e. to be able to handle heavy usage by multiple users.

46. Given that The Application will be available domestically and globally, it is expected that The Company has the potential to successfully grow its business and scale itself up accordingly.

47. The Company will be able to generate increased revenue with a less than direct proportionate increase in operating costs. This operating leverage affords The Company 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)

48. The Company is currently operating in the Australian market. However, it is ultimately intended for worldwide use.

49. The Application will be able to be used worldwide by businesses and jobseekers. Thus, the ultimate addressable market is on a global scale and is not confined to a local city, area or region.

50. The Company has demonstrated The Application has 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)

51. The Application has a number of competitive advantages, including, but not limited to:

a. The Application is the only platform with its unique offering.

52. The Company has demonstrated that The Application has the potential to be able to have competitive advantages, as required by subparagraph 360-40(1)(e)(v).

Conclusion on principles test

53. The Company satisfies the principles based test as it satisfies the requirements within subparagraphs 360-40(1)(e)(i) to (v) for the year ending 30 June 201Y.

Conclusion

54. The Company meets the eligibility criteria of an ESIC under section 360-40(1) for the year ending 30 June 201Y.