Edited version of private advice

Authorisation Number: 1051932685934

Date of advice: 15 December 2021

Ruling

Subject: Eligible accelerator program

Question

Does the Program delivered by Entity A 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 ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Entity A is based in Australia and provides the Program as part of its business.

The Program was first provided in 20XX (which is an income year before the periods that this ruling applies) and the Program is offered to start-ups in a specific industry.

Participants are selected via an application process which is judged against set selection criteria.

The Program runs to a set weekly base curriculum which concludes with a pitch day.

Details of the Program were provided with the private ruling application.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 section 360-40

Income Tax Assessment Act 1997 section 360-45

Reasons for decision

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

Summary

As the Program was first provided in 20XX, which is an income year before the periods to which this ruling applies, the Program satisfies 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

In determining whether a company is an early stage innovation company (ESIC) under paragraph 360-40(1), the company must have at least 100 points under section 360-45 or meet the requirements of subparagraphs 360-45(1)(i) to (v).

In respect of the 100 points, 50 points are available under item 4 of the table in subsection 360-45(1) if a company has:

a)            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.

Paragraph 1.95 of 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):

...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.

Essentially, it is not sufficient for a program to simply meet the generally accepted meaning of the term "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 by meeting the specific requirements listed in item 4 of the table in subsection 360-45(1).

Accelerator program - generally accepted meaning[1].

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 for a fixed term and of 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.

Accelerator programs have been identified as generally having five defining, partially-interdependent features, being: seed funding; cohort based; co-location; a structured program; and mentoring. However, all five features may not be present in all programs.

Application to the Program

Considering these features in relation to Entity A:

(i)            Seed funding - participants receive in-kind services.

(ii)           Cohort based entry and exit - the Program is cohort based and ends with a pitch day.

(iii)         Co-location - participants co-locate for the duration of the program.

(iv)         Structured program -the Program has a structured curriculum.

(v)          Mentoring - the provision of mentors and coaches are part of the structured curriculum.

Conclusion - generally accepted meaning of accelerator program

The information provided by Entity A in respect of the Program demonstrates that it meets the generally accepted meaning of an accelerator program.

Accelerator program - specific requirements

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:

(i)            A merit-based screening process - Entry into the 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 XX program - In some instances it is the founder of a company that is registered to undertake an accelerator program on behalf of the company. 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 - Entity A 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 Entity A.

(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 the Program, or another accelerator program offered by Entity A. The term 'cohort' refers to a group or batch and is not merely one or two entrepreneurs.[2]

Application to the Program

Considering these factors in relation to the Entity A and the Program:

(i)            Merit-based screening process - Entity A requires potential participants to enter into an application and selection process in respect of the Program.

(ii)           The company, not an individual, must complete the program - This is not determinative of the program itself, but it must be the company that completes the Program.

(iii)         Time-limited support - The Program runs for set period with support ended at the end of this period.

(iv)         Six month minimum period - The Program was first offered in 20XX. This more than six months before the first Cohort in the first income year that this ruling applies to will start the Program.

(v)          Prior completion by a cohort of entrepreneurs - The Program has been completed by previous cohorts.

Conclusion - specific requirements

In respect of the Programs that commence in the years that this ruling applies to and on the basis that they will be consistent with the current Program, the specific requirements of item 4 of the table in subsection 360-45(1) will be satisfied.

As the 20XX program was the first program, no cohort of entrepreneurs had already completed a program, the final specific provision of item 4 of the table in subsection 360-45(1) cannot be satisfied in relation to the 20XX program.

Overall Conclusion

The Program is an accelerator program according to the generally accepted meaning. In addition, in relation to programs to be offered in 20XX and any subsequent years, on the basis that those programs will be consistent with the Program outline provided for this private ruling, they will meet the requirements to be an eligible accelerator program according to item 4 of the table in subsection 360-45(1).

[1] ATO publication Eligibility of accelerator programs under the 100-point innovation test

[2] ATO document Eligibility of accelerator programs under the 100-point innovation test