Edited version of your written advice

Authorisation Number: 1051308543836

Date of advice: 15 November 2017

Ruling

Question

Does the Program delivered by the Company meet the requirements of 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 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2017

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

The scheme commences on:

1 July 2016

Subject: Eligible Accelerator Program

1. The Company has been operating for a number of years and runs cohort based programs that run competitive campaigns to source founders to form companies per cohort.

2. Depending on each program, each founder gains funding from the Company’s associated venture fund. The Company (or its subsidiaries) earns a small percentage of equity for its assistance with building the startups, providing business and governance advice and mentoring.

3. Startups can choose to enter a competitive boot camp for the continuing accelerator intake or semi-annually for theme based programs.

4. Up to 1,000 entrants undergo a competitive selection process prior to boot camp, out of which up to 20 will be selected. A Pitch event takes place where approximately 10 winners are selected.

5. The entities that emerge out of the Pitch event proceed to the Company’s program, described as a gated program that forces teams through a vocation training program where failure happens and success is accelerated. From launch to finish the program takes approximately nine months.

6. The Company states that it has run numerous accelerator programs and built over 100 companies over the last few years. The Company has run one particular program (“the Program”) for the past several years. A number cohorts have currently completed that particular program.

7. In return for equity, the Program is run by the Company and provides a startup with:

● A technology team to build a minimum viable product

● Expertise including an assigned Product Manager and Entrepreneur-in-Residence, market-proven curriculum and a cohort of peers

● Co-working space in several sites throughout the six month program

● Access to subject matter experts and customers to validate the startup’s idea

● Initial funding, with further follow-on funding available.

8. The Company’s letter of offer to startups the Agreement that sets out the terms of the provision of the Program by the Company to the startup company, and the respective obligations of the founders, the startup company and the Company in relation to the Program. It contains clauses relevant to “minimum viable product” development, mentoring, development, product design and funding.

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

Summary

The Company’s Program meets the requirements of an eligible accelerator program for the purposes of item 4 of the table in subsection 360-45(1).

Detailed reasoning

Eligible Accelerator Program

1. 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.

2. Accelerators are a relatively new type of organisation. Essentially, an accelerator is a type of organisation that assists new ventures by providing accelerator programs.

3. 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, but regardless, 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).

4. 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.

5. It is not sufficient for a program to simply meet the accepted definition of an accelerator program in order for startups 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).

6. 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.

7. 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:

i. 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.

ii. 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.

iii. Time-limited support - The limited duration is the characteristic that most clearly defines accelerator programs. Generally speaking, a program will run for approximately three to six months.

iv. Six month minimum period - The accelerator must have been providing accelerator programs for a minimum of six 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.

v. 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 your circumstances

8. For the purposes of this ruling the Company’s Program must satisfy two overarching requirements:

1) it is an accelerator program in accordance with the accepted definition; and

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

Accelerator Program

9. The Company’s Program for new ventures, as described in the Agreement, is designed specifically to develop a minimum viable product and to learn and understand the potential market and product fit... to offer to its target market”. This purpose clearly fits some accepted characteristics of an accelerator program, being to assist cohorts of new ventures to define and build their initial products, and identify promising customer segments.

10. Other clauses of the Agreement reinforce the “defining and building initial products” element of its program.

11. In addition, each founder gains seed funding from the Company’s associated venture fund and is entitled to co-working space throughout the program. These elements of seed funding and provision of working space are indicative of an accelerator program.

12. The Company’s program provides business and governance advice and mentoring, including access to subject matter experts to validate the startup’s idea. Expertise may include an assigned Product Manager and Entrepreneur-in-Residence and a cohort of peers. The Agreement outlines the mentoring services on offer as part of the program.

13. The access to subject matter experts and the guidance offered under its program are further indicators of an accelerator program, since accelerator programs typically offer significant networking, educational and mentorship opportunities with both peer ventures and mentors.

14. In short, it is accepted that the Program meets all of the major defining characteristics of what is regarded as an accelerator program.

Eligible Accelerator Program

15. 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

16. Startups can choose to enter a competitive boot camp or semi-annually for theme based programs. Up to 1,000 entrants undergo a competitive selection process prior to boot camp, out of which up to 20 will be selected. A Pitch event then takes place where approximately 10 winners are selected. The entities that emerge out of the Pitch event proceed to the Program.

17. This selection process does not offer entry based on payment of a fee. It is highly competitive and open to any applicant. Selection of startups for its program is a merit-based screening process.

The company, not an individual, must complete the program

18. The Agreement is a three-way agreement between the Company, the founder and the startup company. As a consequence it cannot be argued that the company does not complete the program, despite the founder also doing so.

19. It is accepted that companies undertake and the Company’s Program.

Time-limited support

20. Generally, time-limited support will mean a program lasting between three to six months. The Company’s accelerator programs are completed within approximately nine months.

21. The broadly accepted length of three to six months is considered indicative only. It is designed to provide guidance rather than be a definitive rule. Despite being slightly longer in duration, the Company’s Program nonetheless overlaps with the generally accepted timeframe.

22. Regardless, the program is of a sufficiently short time period as to be intensive enough that both failure and success are accelerated. The program is in effect designed for failure and success to occur in an accelerated fashion, thus weeding out the companies less likely to be successful in the longer term. A necessary component of this process is the time-limited nature of the program.

23. In short, the Program meets the characteristic of providing time-limited support.

Six month minimum period

24. The Company has run numerous accelerator programs and built over 100 companies over the last five years.

25. The Company meets the requirement of having provided accelerator programs for a minimum period of six months.

Prior completion by a cohort of entrepreneurs

26. The Company has run its Program for several years. There have been a number of cohorts to have completed the Program.

27. The Company meets the requirement that it have at least one cohort of entrepreneurs previously complete one of its accelerator programs.

Conclusion

28. The Company’s Program is an accelerator program according to the accepted 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).