Edited version of private advice

Authorisation Number: 1051766758259

Date of advice: 13 October 2020

Ruling

Subject: Early stage innovation company status

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 20xx

The scheme commences on:

Xx xx 20xx

Relevant facts and circumstances

1.    The Company was incorporated in Australia on XX September 20xx. Its equity interests are not listed for quotation in the official list of any stock exchange. The Company has no subsidiaries.

2.    The Company had expenses of $1,000,000 or less in the previous income year.

3.    The Company had assessable income of less than $200,000 in the previous income year.

4.    The Company received a private ruling for the year ended 30 June 20xx concluding that they were an ESIC on the basis that they passed the principles based test in respect of the Product.

5.    Since the ruling issued the Company has continued to develop the Product. The Company has stated there is still development to be done before the Product can be marketed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 section 360-40

Reasons for decision

Summary

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

Detailed reasoning

Qualifying Early Stage Innovation Company

6.    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'

7.    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)

8.    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).

9.    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.

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

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

11.  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)

12.  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)

13.  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

14.  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)

15.  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.

16.  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.

17.  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

18.  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 20xx.

Current year

19.  For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 20xx (the 20xx income year).

Early stage test

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

20.  As the Company was incorporated on XX xx 20xx, which is within the last 3 income years, subparagraph 360-40(1)(a)(i) is satisfied.

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

21.  As the Company had expenses of $1 million or less in the prior income year (the 20xx income year), paragraph 360-40(1)(b) is satisfied.

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

22.  As the Company's assessable income in the prior income year (the 20xx income year) was $200,000 or less paragraph 360-40(1)(c) is satisfied.

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

23.  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

24.  The Company will satisfy the early stage test for the entire 20xx income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.

Principles based test

25.  In the ruling for the year ending 30 June 20xx we concluded that the Company passed the principles based test in respect of the Product they are developing. While the Product is still being 'developed' they will continue to satisfy the principles based test in the 20xx income year.

26.  The Company provided an outline of the progress made since the ruling for the year ended 30 June 20xx issued and details of how long they think it will take to fully develop the Product.

27.  Therefore, the Company meets the eligibility criteria of an ESIC under section 360-40 for the period commencing 1 July 20xx until the earlier of 30 June 20xx or the date when the Product has been fully developed and is ready for use, whichever occurs earlier.