Edited version of private advice

Authorisation Number: 1051915200531

Date of advice: 5 November 2021

Ruling

Subject: Eligible accelerator program

Question

Does the program delivered by Coy A Pty Ltd 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 periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

August 20XX

Relevant facts and circumstances

The program has been operating since 20XX.

The program provides participants with:

a)  Investment

b)  Prototyping Lab and Engineering Support

c)   Mentorship

d)  Access to Strategic Partners

e)  Access to Networks

The application process for the program is publicly promoted via social media forums and publicly accessible via the Coy A Pty Ltd website.

Candidates can submit an expression of interest and shortlisted candidates will be interviewed.

Candidates are evaluated on their merits and suitability to the program. Successful applicants will commence the program as soon as all prerequisite deliverables have been submitted.

The selection process does not offer entry based on payment of a fee, nor does the company solicit any contribution in-kind or equity stake in the application or review process.

Applicants are accepted on a rolling basis and complete the program in approximately six months. The first cohort of participants completed the program in 20XX.

The program is open to companies to apply. To date, all cohort members have been registered companies.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 Section 360-45

Reasons for decision

Summary

The program meets the requirements of an eligible accelerator program for the purposes of item 4 of the table in subsection 360-45(1). The program first meets the requirements of an eligible accelerator program in 20XX when the first cohort of participants completed the program.

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 the 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.

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 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 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

For the purposes of this ruling, the program must satisfy two overarching requirements:

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

      ii.        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.

The program is designed specifically to support competitively selected start-ups aiming to develop hardware products.

The program provides participants with investment, prototyping lab and engineering support, mentorship, access to strategic partners, and networking opportunities.

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.

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

The application process for the program is publicly promoted via social media forums and publicly accessible via the Coy A Pty Ltd website. It is a competitive process based on the candidates' ability to present a set of pre-requisite deliverables. Candidates are evaluated on their merits and suitability to the program.

The selection process does not offer entry based on payment of a fee, nor does Coy A Pty Ltd solicit any contribution in-kind or equity stake in the application or review process.

The company, not an individual, must complete the program

The program is open to companies to apply. To date, all cohort members have been registered companies.

Should any instances occur where an individual alone (and not the company) completes the program, the requirements of item 4 of the table in subsection 360-45(1) will not be met.

Time-limited support

Generally, time-limited support will mean a program lasting between 3 to 6 months. The program is completed over approximately six months.

Therefore, the program meets the characteristic of providing time-limited support.

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).

The first accelerator program run by Coy A Pty Ltd commenced in 20XX.

Coy A Pty Ltd meets the requirements of having provided an accelerator program for a minimum period of six months.

Prior completion by a cohort of entrepreneurs

Coy A Pty Ltd has run its accelerator program since 20XX. Coy A Pty Ltd accepts applications on a rolling basis. Start-Ups are accepted into the program individually and not as an intake of a group of participants. However, companies have historically come into the program around the same time. A number of companies started the program in early 20XX, a further number of companies started the program in late 20XX. As of present day, X Start-Ups have completed the program.

The first cohort of companies had completed the program by mid 20XX.

The program meets the requirement that it has at least one cohort of entrepreneurs previously complete its accelerator program. It first met this requirement in 20XX.

Conclusion

The 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). The program first met these requirements in 20XX, when the first cohort of participants completed the program.