Edited version of private advice

Authorisation Number: 1051880933565

Date of advice: 4 August 2021

Ruling

Subject: Eligible accelerator program

Question

Does the accelerator 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 periods:

1 July 20XX to 30 June 20YY

1 July 20YY to 30 June 20ZZ

1 July 20ZZ to 30 June 20AA

1 July 20AA to 30 June 20BB

The scheme commences on:

I July 20XX

Relevant facts and circumstances

1.            The Company provides assistance to developers of innovations through a time limited accelerator program.

2.            The program is designed to support a cohort of competitively selected start-ups in a particular industry.

3.            The selection process does not include any application fee and is independent of any other processes related to procuring investor funding of the program.

4.            The company markets the program widely, including on the Company's website.

5.            All applicants are evaluated under the same process.

6.            Candidates undergo a merit based selection process.

7.            The accelerator program delivered by the Company has been operating since 20WW and has delivered more than 2 cohort programs.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 section 360-4

Reasons for decision

These reasons for decision accompany the Notice of private ruling for the Company.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

All legislative references are the to the Income Tax Assessment Act 1997 unless otherwise indicated.

Summary

The Company's accelerator 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

8.            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 6 months; and

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

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

10.         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).

11.         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.

12.         It is not sufficient for a program to simply meet the ordinary 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).

13.         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.

14.         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 3 to 6 months.

iv. Six-month minimum period - The accelerator must have been providing accelerator programs for a minimum of 6 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

15.         For the purposes of this ruling, the Company's accelerator program must satisfy two overarching requirements:

i. it is an accelerator program in accordance with the ordinary definition; and

ii. it is an eligible accelerator program in accordance with item 4 of the table in subsection 360-45(1).

Accelerator Program

16.         Accelerators are organisations that offer a range of support services and funding opportunities for start-ups.

17.         The Company's accelerator program provides a range of support services to participants including business planning, introduction to key contacts, and access to funding, with the aim of increasing the participants' likelihood of success.

18.         The program assists early stage start-up companies by offering mentorship, assistance with business development and investment, planning and preparation, and business networking.

19.         Participants are also introduced to relevant service providers and assisted with capital raising on a needs basis.

20.         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.

21.         It is accepted that the Company's program meets all of the major defining characteristics of what is regarded as an accelerator program.

Eligible Accelerator Program

22.         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

23.         The application process for the Company's accelerator program is promoted widely and marketed to the general public via the Company's website.

24.         All applicants will be evaluated under the same process.

25.         Selection to the program involves analysis of the potential participants' innovation by a panel before the recommendation of a number of applicants to participate in the program is made.

26.         The selection process does not offer entry based on payment of a fee.

27.         The screening process is merit-based.

The company, not an individual, must complete the program

28.         The Company's accelerator program is open for companies to apply.

29.         Individuals, selected to participate, form companies as part of the commercialisation process.

30.         It must be noted however, that instances where an individual alone (and not a company) completes the Company's accelerator program, the requirements of item 4 of the table in subsection 360-45(1) will not have been met.

Time-limited support

31.         Generally, time-limited support will mean a program lasting between 3 to 6 months. However, this is broadly considered indicative only. It is designed to provide guidance rather than be a definitive rule.

32.         The Company's accelerator program is sufficiently short enough and intensive enough that the success or failure of the participants' innovations are accelerated.

33.         Therefore, the Company's accelerator program meets the characteristic of providing time-limited support.

Six-month minimum period

34.         The accelerator must have been providing accelerator programs for a minimum of 6 months at the test time (when the potential ESIC issues shares to the investor).

35.         The Company's accelerator program has been operating since 20XX and has delivered a number of cohort programs.

36.         The Company has been running similar accelerator programs since 20XX.

37.         The Company meets the requirements of having provided an accelerator program for a minimum period of six months.

Prior completion by a cohort of entrepreneurs

38.         The Company's accelerator program has been operating since 20XX and has delivered a number of cohort programs.

39.         The Company has been running similar accelerator programs since 20XX.

40.         The Company meets the requirement that it has at least one cohort of entrepreneurs previously complete its accelerator program.

Conclusion

The Company's accelerator program is an accelerator program according to the ordinary 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).