Edited version of private advice

Authorisation Number: 1051795495650

Ruling

Subject: Eligible accelerator program

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 period:

Year ended 30 June 2023

The scheme commences on:

1 July 2020

Subject: Eligible accelerator program

Relevant facts and circumstances

The Company has provided a program offered to start-up companies since 2019.

Start-ups apply through an open merit-based process, undergoing competitive selection that results in approximately 10 progressing to complete the company's program.

The Company has run programs ('the Program') in past years. A number of cohorts have completed previous programs.

The Program run by the Company provides start-ups with:

•   guidance, mentorship, education, corporate support, co-working space access, networks and funding to underpin growth

•   Access to subject matter experts and customers to validate the start-up's idea

The Company's letter of offer and Program Agreement provided to the start-ups sets out the terms, conditions and services provided and the responsibilities of each party.

On successful completion of the program the start-ups (founders and companies) are issued certificates.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 section 360-45

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise indicated.

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

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 six months; and

c)    such programs have been completed by at least one cohort of entrepreneurs.

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

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).

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.

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

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.

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

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

Accelerators are organisations that offer a range of support services and funding opportunities for start-ups. As detailed in Company's Program Agreement, their program combines expertise, networks and resources of large organisations with the agility of start-ups, increasing the likelihood of success, providing start-ups with guidance, mentorship, education, corporate support, co-working space access, networks and funding to underpin growth.

This purpose clearly fits with the 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.

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.

It is accepted that the Program meets all of the major defining characteristics of what is regarded as an accelerator program.

Eligible accelerator program

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

For each program, start-ups apply through an open merit-based process, undergoing competitive selection that results in approximately 10 progressing to complete the company's program.

This selection process does not offer entry based on payment of a fee. It is highly competitive and open to any applicant.

The company, not an individual, must complete the program

The program is offered to both start-up companies and individuals. That is, there will be occasions where individuals are certified at the completion of the program and occasions where both the company and the individual are certified.

It is accepted that companies undertake and complete the program. It must be noted however that instances where an individual alone (and not a company) is certified upon completion of the program, the requirements of item 4 of the table in subsection 360-45(1) will not have been met.

Time-limited support

Generally, time-limited support will mean a program lasting between three to six months. The broadly accepted length of six months is considered indicative only. It is designed to provide guidance rather than be a definitive rule.

The Company's program is conducted within the generally accepted timeframe and the program is of a sufficiently short time period as to be intensive enough that both failure and success are accelerated. The Company's program meets the characteristic of providing time-limited support.

Six-month minimum period

The Company has run prior programs.

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

Prior completion by a cohort of entrepreneurs

The Company has run its Program in previous years. There have been a number of Cohorts that have completed the Programs run by the Company.

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

Conclusion

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) of the ITAA 1997.