Edited version of your written advice

Authorisation Number: 1051439507520

Date of advice: 12 October 2018

Ruling

Subject: Early stage innovation company qualification

Question

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)?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

1. Company A was incorporated in Australia on Date X. Its equity interests are not listed for quotation in the official list of any stock exchange. Company A was registered on the Australian Business Register (ABR) on Date Y.

2. Company A has no subsidiaries and in the previous year i.e. the year ended 30 June 2018 Company A has expenses of $X.

3. In the previous income year, i.e. the year ended 30 June 2018 Company A had no assessable income.

4. On Date Z Company A received a private ruling for the year ended 30 June 2018 (authorisation number Ref 5587) that they were an ESIC on the basis that they passed the principles-based test in respect of an innovation they were developing.

5. The details of this development were included in the facts ‘Relevant facts and circumstances’ of the year ended 30 June 2018 ruling.

6. Since the ruling issued the timeline for fundraising has extended beyond 30 June 2018 which will also delay the timeline for commercialisation.

7. Company A also made the decision to relocate their premises but the activities that were ruled on will be undertaken at the new premises.

Information provided

8. You have provided information in a number of documents in relation to refinery, including:

a. Your original private ruling application.

b. The information provided with the application.

c. Supplementary information in respect of original ruling application.

d. Your new private ruling application.

e. Supplementary information in respect of the new ruling application

9. We have referred to the relevant information within these documents and conversations in applying the relevant tests to your circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 section 360-40

Reasons for decision

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

Summary

Company A meets the eligibility requirements of, an ESIC under, subsection 360-40(1).

Detailed reasoning

Qualifying Early Stage Innovation Company

10. 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’

11. 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)

12. 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 ABR within the last three income years (the latest being the current year).

13. 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.

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

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

15. 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)

16. 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)

17. 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

18. 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

19. 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 (v)

20. 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.

21. 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.

22. 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

23. For the purposes of this ruling, the test time for determining if Company A is a qualifying ESIC will be a particular date during the income year ending 30 June 2019.

Current year

24. For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 2019 (the 2019 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 2019, 2018 and 2017, and the income year before the current year will be the year ending 30 June 2018 (the 2018 income year).

Early stage test

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

25. As Company A was registered on the ABR on Date Y, which is within the last 3 income years, subparagraph 360-40(1)(a)(iii) is satisfied.

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

26. As Company A had expenses of $1 million or less in the prior income year paragraph 360-40(1)(b) is satisfied.

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

27. As Company A’s assessable income for the prior income year is $200,000 or less paragraph 360-40(1)(c) is satisfied.

No stock exchange listing – paragraph 360-40(1)(d)

28. As Company A is privately owned and is not listed on any stock exchange in Australia or a foreign country, subparagraph 360-40(1)(d) is satisfied.

Conclusion on early stage test

29. Company A will satisfy the early stage test for the entire 2019 income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.

Principles based test

30. In the ruling issued on Date Z we concluded that Company A, passed the principles based test in respect of the refinery they are developing. While the innovations ruled on are still being ‘developed’ they will continue to satisfy the principle based test.

31. The timeline initially provided has changed as Company A is still securing funding. This will delay the date of commercialisation to some point beyond Company A’s initial expectations.

32. Therefore Company A meets the eligibility criteria of an ESIC under section 360-40 for the period commencing 1 July 2018 until the earlier of 30 June 2019 or the date their innovation has been fully developed and are ready for use, whichever occurs earlier.