| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051516760956
Date of advice: 13 May 2019
Subject: Early stage innovation company qualification
Question
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:
Year ending 30 June 2019
The scheme commences on:
1 July 2018
Relevant facts and circumstances
1. The company was incorporated in Australia in the 2017 income year. Its equity interests are not listed for quotation in the official list of any stock exchange.
2. The company has no subsidiaries.
3. The company had expenses of less than $1 million dollars the year ended 30 June 2018.
4. The company generated no assessable income in the previous income year, i.e the year ended 30 June 2018.
5. The company received a private ruling for the year ended 30 June 2018 that they were an ESIC on the basis that they passed the principles based test in respect of the innovation.
6. Details of the development of the innovation were included in the ruling received.
7. Since the ruling issued the company has continued to develop the innovation and has taken the following steps towards commercialisation:
a. Further testing has been conducted.
b. A partnership established.
Information provided
8. You have provided information in a number of documents and phone conversations in relation to the innovation, including:
a. your original private ruling application.
b. your new private ruling application and supplementary information submitted.
c. a phone conversation.
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
The company meets the eligibility requirements of, an ESIC under, subsection 360-40(1).
Detailed reasoning
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.
‘‘Principles-based test’ – subparagraphs 360-40(1)(e)(i) to (v)
10. 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.
11. 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.
12. 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
13. 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 2019.
Current year
14. For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 2019 (the 2019 income year).
Early stage test
Incorporation or Registration – paragraph 360-40(1)(a)
15. As The company was incorporated in the 2017 income year, which is within the last 3 income years, subparagraph 360-40(1)(a)(i) is satisfied.
Total expenses – paragraph 360-40(1)(b)
16. As the company 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)
17. As the companys’ assessable income in the prior income year (the 2018 income year) is $200,000 or less paragraph 360-40(1)(c) is satisfied.
No stock exchange listing – paragraph 360-40(1)(d)
18. As the company 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
19. The company 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
20. In the previous ruling issued for the 2018 income year we concluded the company passed the principles based test in respect of the development of the innovation. While the innovation is still being ‘developed’ the company will continue to satisfy the principle based test.
21. Your private ruling application provides an outline of the progress made since the ruling for the year ended 30 June 2018 issued and details of how it is currently being developed.
22. Therefore the company 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 when the innovation has been fully developed and is ready for use, whichever occurs earlier.