Edited version of private advice

Authorisation Number: 1051794830677

Date of advice:

Ruling

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

No

This ruling applies for the following period:

Year ending 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

1. The Company was incorporated in Australia within the last three income years. Its equity interests are not listed for quotation in the official list of any stock exchange.

2. The Company has no subsidiaries and its expenses for the year ending 30 June 2020 were below $1 million.

3. The Company assessable income for the same income year (ending 30 June 2020) was over $200,000.

4. The Company received a private ruling for the income year ending 30 June 2020 confirming that they met the eligibility criteria of an ESIC under subsection 360-40(1) for the period commencing 1 July 2019 until 30 June 2020.

5. Since the previous private ruling was issued the Company has issued new shares and is likely to issue additional new shares before the end of this financial year ending 30 June 2021.

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 ITAA 1997 unless otherwise indicated.

Summary

The Company does not meet 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 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, before the current year, 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.

7.     A company that does not meet this condition will not qualify as an ESIC.

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.

9.     A company that does not meet this condition will not qualify as an ESIC.

Application to your circumstances

Test time

10.  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 2021.

Current year

11.  For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 2021. For clarity, in relation to particular requirements within subsection 360-40(1), the last three income years will include the years ending 30 June 2021, 2020 and 2019 and the income year before the current year will be the year ending 30 June 2020.

Early stage test

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

12.  As the Company was incorporated in Australia within the last three income years, subparagraph 360-40(1)(a)(i) is satisfied.

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

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

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

14.  The Company's assessable income for the prior income year ending 30 June 2020 was over $200,000. 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. As the Company's assessable income for the income year ending 30 June 2020 exceeded $200,000, they do not meet the assessable income criteria of the early stage test.

Conclusion

The Company's assessable income for the income year ending 30 June 2020 exceeded $200,000. Therefore, they do not meet the eligibility requirement in paragraph 360-40(1)(c) and will not qualify as an ESIC under section 360-40 for the income year ending 30 June 2021.