Edited version of private advice

Authorisation Number: 1052020034700

Date of advice: 2 February 2023

Ruling

Subject: Early stage innovation company

Question

Does Company A meet the criteria of an Early Stage Innovation Company ('ESIC') under subsection 360-40(1) of the Income Tax Assessment Act 1997 ('ITAA 1997') for the period x XX 20XX to yy YY 20YY?

Answer

Yes.

This ruling applies for the following periods

x XX 20XX to yy YY 20YY

The Scheme commences on

x XX 20XX

RELEVANT FACTS AND CIRCUMSTANCES

Background Facts

1.      Company A is an Australian proprietary company incorporated in XYZ on x YY 20XY.

2.      Company A's directors are Taxpayer A, Taxpayer B and Taxpayer C.

3.      Company A's registered office and principal place of business is situated at XYZ.

4.      Company A is the head company of an income tax consolidated group. Company A is the company genuinely focused on developing the improved service and organisational method. Company A has established subsidiaries, primarily to open outlets which utilise Company A's model.

5.      For the financial year ending xx YY 20XY, Company A incurred and earned the following:

•           Total expenses of $xxx

•           Total income of $yyy

6.      Company A's equity interests are not listed for quotation in the official list of any stock exchange, either in Australia or a foreign country.

Development of organisational method

7.      Company A is developing an improved service and organisational method in a particular industry. The organisational method being developed, combined with specialised technology, is a significant step forward in the Australian market, which will significantly reduce the cost and allow individuals to access previously expensive services.

8.      The innovative service and organisational method will limit its services. Previously, such services have only been provided by specific outlets.

9.      The reduced offering allows Company A to streamline all of the processes throughout the organisation. Further to this, the number of products to order and amount of training required.

10.   In addition, staff members are trained to operate specialised equipment.

11.   The services offered, typically involve longer appointment times, which means the volume of clients is proportionally much lower, resulting in a reduction in administrative tasks.

12.   Company A also has integrated advanced technology.

13.   By utilising this technology and its new organisational method, Company A will be able to offer services seamlessly, in one place, much faster than other outlets are able to offer.

14.   Company A will also offer this service at a significantly reduced cost to the customers.

15.   By offering these services at the same or cheaper price point than the likes of Outlets overseas, but at Australian standards, Company A is changing the industry, and will ultimately keep much of this work from going overseas.

16.   Limiting the services which Company A provides allows a far improved service for a lower price.

17.   Although individual elements of Company A's business model are in operation in other outlets, they have not been combined in the same way.

18.   Company A is developing their service/organisational method to address a number of discrete markets and is continuing to develop their service/organisational method.

19.   Company A's organisational method has been identified as having an international addressable market.

Development stages

20.   Work undertaken prior to present time:

•         Proof concept on paper - this included understanding the opportunity in the market and developing an organisational model on paper to seek investment. This covered the period from incorporation until YY 20XY. As this was mostly conceptualisation of the model and presenting it to potential investors, it involved a considerable amount of time, but negligible tangible costs.

•         Proof of concept in practice - opening a pilot outlet in XYZ in YY 20XY to implement the organisational method (including training staff, etc). This practice was established to trial the concept and further develop the model.

•         Further refinement of organisational method - this includes testing different ways of operating. Including:

o   How to attract clients - including testing different marketing strategies, and collecting data on how clients were obtained

o   Client Onboarding - testing the best methods of onboarding new clients.

o   Process Development - in particular, testing how tasks could be undertaken by staff following training and the impact of the service (time, quality etc).

o   Quality testing and refining of manufacturing systems

o   Further development of onboarding, training systems, and processes to teach new team members

o   Adjusting regularly to challenges or unique situations that hadn't previously anticipated, and where necessary, implementing new systems, approaches, and ideas to address these.

o   The refinement of the process commenced in XX 20XY and is ongoing to the present time.

21.   Specific development from Incorporation to Share Issue:

•         Developing the model on paper and obtaining investment to fund the commercialisation.

•         As evident from the business plan provided to investors, the investments were made because Company A was focused on developing this significantly improved organisational method and service. The proposed plan was a new concept in the industry, and one that caused much excitement, especially for those with experience in the industry.

22.   Current development for commercialisation:

•         As at yy YY 20YY, the frame of the organisation method had been established, but was still undergoing significant refinement, including:

•         Understanding operational challenges across multiple locations.

•         Continued refinement of training and operating procedures to further increase efficiencies across the business.

•         Identifying opportunities that Company A hadn't anticipated

•         Adjusting regularly to challenges or unique situations that Company A hadn't previously anticipated, and where necessary, implementing new systems, approaches, and ideas to address these. This process is expected to be ongoing.

23.   Future development:

•         Expansion into further locations and analysing the differences between locations and what challenges, strengths, and differences there are across locations nationwide

•         Further refinement of all administrative processes, including training and documentation, which will be standardised across all locations.

•         The marketing and onboarding process for clients.

•         Another 12-24 months of trading to continue to understand Company A's clients, and how its offering can improve. Over this time, continued analysis is critical to continuing to develop and improve its methods.

Commercialisation strategy

24.   Company A has established a plan to take the business from research and development, through to a commercially viable operation.

25.   Key to commercialising the investment was testing and determining:

•         Whether bringing the technology in-house was viable

•         The best way to implement the new organisational methods, including how to effectively and efficiently train staff in the new methods; and

•         Understanding the cost drivers in practice, not just in theory, to assess whether the innovation could be commercially viable.

26.   The business plan set out an initial road map, including the intention to open xx outlet locations across Australia, including a pilot outlet in XYZ, before expanding to ZZZ and YYY. Company A's intention to expand into several other locations beyond the proof of concept is still in place, however the timeline may be slightly longer than originally planned. Following this initial rollout, and consolidation into most major cities in Australia, the business plan includes potential further expansion into large coastal/regional towns. The viability of such an expansion will be reassessed once Company A is comfortably established in the major cities.

High growth potential

27.   While commencing in XXX, Company A intends to expand to have numerous outlets across Australia. This particular Australian industry has a total turnover of $xyz.

28.   Due to the cost savings compared to other offerings, Company A has clear growth potential, in a very large market. The potential is evidenced by the plans to expand across Australia. Having already received interstate customers at the XXX pilot outlet, it is expected Company A will be able to access the international market, as well as customers otherwise unable to afford the procedure at an outlet closer to where they reside. It can also be seen in the growth forecasts, with revenue forecast to exceed $xx per month in the next 24 months.

29.   Company A will grow by attracting clients seeking a high-quality service at a drastically cheaper price point than other outlets. The growth will be fuelled by opening outlets throughout the country and gaining access to new markets.

30.   Company A engages new clients through direct marketing and either directs them to its website where they can provide the information, which is required to enquire about the services, or by increasing their awareness and getting them to call. Clients are attracted to Company A's website and phone numbers, using SEO, google ads, billboards, social media, and other direct marketing.

31.   This is Company A's direct marketing approach to finding clients. Marketing is based around services and relies heavily on this to attract new clients. Company A also attracts clients by word of mouth, including those interstate clients referred to above, as there has not been any marketing undertaken in those locations.

Scale up the business

32.   Once the organisational method has been further developed and refined, Company A will benefit from reduced operating costs with each outlet which is added to the organisation. This includes cheaper training costs, better purchasing power in relation to the advanced technology being brought in-house, shared expenses such as management and marketing, and a more efficient service.

33.   This will ensure the business will not only scale, but its margins should also increase as it scales.

34.   With additional outlets, there are a few factors which are expected to result in lower operating costs per patient:

•         Marketing expenses are currently quite high. These expenses are necessary to increase brand awareness. As brand awareness increases nationally, word of mouth increases, and marketing efforts across outlets can be consolidated nationally, rather than separate local campaigns.

•         Company A's buying power increases as more clients are obtained and more product purchases are required. Many of Company A's costs are for things such as materials, which are relatively expensive. Buying power in this regard can have a significant impact on expenses.

•         Improved expertise and efficiency of the staff.

•         Centralised preparation of training methods which be rolled out to all outlets resulting in lower training cost per head.

Broader than local market

35.   Company A plans to expand nationally. Company A already has sites in XXX and YYY. It is also in the process of opening a practice in ZZZ which is scheduled for YY 20YY.

36.   In terms of international expansion, Company A is actively targeting individuals who would otherwise seek to have services completed overseas. This is evidenced on the website which compares the service to overseas work.

37.   Some customers are travelling overseas to have services completed internationally. In particular, XXX and YYY are common destinations given the price at which these procedures are being offered. While Company A is unable to offer these services at the same price as some international countries, the cost associated with international flights and accommodation, and the risks associated with having this type of service overseas, Company Al's service becomes increasingly attractive to consumers. This is a market which was previous inaccessible to general outlets in Australia.

38.   Company A intends to access this market by advertising directly to consumers, making them aware of the reduced cost procedures which are available within Australia.

Competitive advantages

39.   The operational method which Company A is developing allows them to provide procedures at a reduced cost when compared to general outlets. While the reduced cost services will be the largest driving factor for consumers utilising Company A's services, the cost involved in obtaining the technology, and specific staff training provided by Company A provides a barrier to entry for established outlets and low-cost outlets. This barrier to entry provides a further advantage for Company A.

40.   Company A also has several management advantages including:

•         Directors with extensive experience in owning and managing these particular types of outlets

•         Experience recruiting, training and assisting staff.

41.   There are no direct competitors with the same approach in the market, but the competitive advantage against general outlets stems from Company A's significant improvements to the organisational method and how the services are provided.

Information provided

42.   You have provided a number of documents containing detailed information in relation to Company A's organisational method, including:

•         Private Binding Ruling ('PBR') Application, dated y XY 20YY

•         Response to further questions provided

43.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

44.   Company A issued $xxx of ordinary shares to investors on x YY 20XY.

Assumption(s)

Not applicable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 section 360-15

Income Tax Assessment Act 1997 section 360-40

Income Tax Assessment Act 1997 section 360-45

Further issues for you to consider

Not applicable.

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

SUMMARY

Company A meets the eligibility requirements of an ESIC under subsection 360-40(1) for the period x XX 20XX to yy YY 20YY.

DETAILED REASONING

Qualifying Early Stage Innovation Company

45.   Subsection 360-40(1) outlines the criteria required for a company to qualify as an Early Stage Innovation Company (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'

46.   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)

47.   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 any 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).

48.   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.

49.   A company that does not meet any of these conditions will not qualify as an ESIC.

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

50.   To meet the requirement in paragraph 360-40(1)(b), the company and any 100% subsidiaries must have incurred total expenses of $1 million or less in the income year before the current year.

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

51.   To meet the requirement in paragraph 360-40(1)(c), the company and any 100% subsidiaries must have derived total assessable income of $200,000 or less in the income year before the current year.

No stock exchange listing - paragraph 360-40(1)(d)

52.   To meet the requirement in paragraph 360-40(1)(d), the company must not be listed on any stock exchange in Australia or a foreign country.

'INNOVATION TESTS'

53.   If the company satisfies the early stage test, the company must also satisfy one of two innovation tests: the objective (100 point) test or the principles-based test.

'100 POINT TEST' - PARAGRAPH 360-40(1)(e) AND SECTION 360-45

54.   To satisfy the 100 point test the company must obtain at least 100 points by meeting the innovation criteria in the table within section 360-45. The criteria are tested at a time immediately after the relevant shares are issued. If a company satisfies this test, it does not need to satisfy the principles-based test.

'PRINCIPLES-BASED TEST' - SUBPARAGRAPHS 360-40(1)(e)(i) TO (v)

55.   To satisfy the principles-based test, the company must meet five requirements in paragraph 360-40(1)(e). This is tested at a time immediately after the relevant new shares are issued to the investor.

56.   The company can demonstrate that it meets each requirement through existing documentation such as a business plan, commercialisation strategy, competition analysis or other company documents. The company must be able to show that tangible steps have been or will be taken in relation to each of the requirements.

57.   The five requirements of the principles-based test, as outlined in paragraph 360-40(1)(e) are:

          i.          the company must be genuinely focussed on developing for commercialisation one or more new or significantly improved products, processes, services or marketing or organisational methods

         ii.          the business relating to that innovation must have a high growth potential

        iii.          the company must demonstrate that it has the potential to be able to successfully scale up the business relating to the innovation

        iv.          the company must demonstrate that it has the potential to be able to address a broader than local market, including global markets, through that business, and

         v.          the company must demonstrate that it has the potential to be able to have competitive advantages for that business.

Developing new or significantly improved innovations for commercialisation - subparagraph 360-40(1)(e)(i) ITAA 1997

58.   For the purposes of Subdivision 360-A, the Explanatory Memorandum to the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 ('EM') provides the following at paragraph 1.76 in relation to the definition of innovation:

"Implicit in the definition of innovation is the requirement that the company is developing a new or significantly improved type of innovation such as a product, process, service, marketing or organisational method. This list of various types of innovations provides flexibility for innovation companies and is adaptable to current and future innovations. The Oslo Manual, published by the Organisation for Economic Co-operation and Development (OECD) provides a description of these different types of innovations..."

59.   The innovation being developed by the company must either be new or significantly improved for an applicable addressable market.[1] The company's addressable market is the revenue opportunity or market demand arising from the innovation or the related business. The addressable market must be objective and realistic.

60.   Improvements must be significant in nature to meet this requirement. Significant is defined in the online Macquarie Dictionary as "important; of consequence." Customising existing products or minor changes resulting from software updates, pricing strategies or seasonal changes are examples of improvements that would not be considered significant.

61.   The OECD Oslo Manual, in relation to defining innovative services, states at paragraph 161 that "innovations in services can include significant improvements in how they are provided (for example, in terms of their efficiency or speed), the addition of new functions or characteristics to existing services, or the introduction of entirely new services."

62.   The company must be genuinely focussed on developing the innovation for a commercial purpose in order to generate economic value and revenue for the company. This requirement draws the distinction between simply having an idea and commercialising an idea.

63.   For a company to qualify as an ESIC under the principles based test, the company must be "genuinely focussed on developing for commercialisation" their innovation. That is, the central activities of the company must be truly concentrated on developing their innovation for a commercial purpose. 'Commercialisation' includes a range of activities that involve the implementation or sale of a new or significantly improved innovation that will directly lead to the generation of economic value for the company.

High growth potential - subparagraph 360-40(1)(e)(ii) ITAA 1997

64.   The company must be able to demonstrate that the business relating to the innovation has a high growth potential within a broad addressable market. This refers to the company's ability to rapidly expand its business. Companies that are limited to supplying local customers will not meet this requirement.

Scalability - subparagraph 360-40(1)(e)(iii) ITAA 1997

65.   The company must be able to demonstrate that it has the potential to successfully scale up the business relating to the innovation. The company must have operating leverage, whereas it increases its market share or enters into new markets, its existing revenues can be multiplied with a reduced or minimal increase in operating costs.

Broader than local market - subparagraph 360-40(1)(e)(iv) ITAA 1997

66.   The company must be able to demonstrate that it has the potential to address a market that is broader than a local city, area or region. The company does not need to have a serviceable market at a national, multinational or global scale at the test time. However, it does need to show that the business is capable of addressing a market that is broader than a local market and that the business can be adapted to a broader scale in the future.

Competitive advantages - subparagraph 360-40(1)(e)(v) ITAA 1997

67.   The company must be able to demonstrate that it has the potential to have competitive advantages, such as a cost or differential advantage over its competitors which are sustainable for the business as it expands. The company can analyse what competitors in the market offer and consider whether the company has a differentiating advantage that would allow it to outperform these competitors.

Foreign Company test - paragraph 360-40(1)(f)

68.   At the test time, the company must not be a foreign company within the meaning of the Corporations Act 2001 (Cth).

69.   The dictionary in section 9 of the Corporations Act 2001 (Cth) defines a foreign company to mean:

(a) a body corporate that is incorporated in an external Territory, or outside Australia and the external Territories, and is not:

(i) a corporation sole; or

(ii) an exempt public authority; or

(b) an unincorporated body that:

(i) is formed in an external Territory or outside Australia and the external Territories; and

(ii) under the law of its place of formation, may sue or be sued, or may hold property in the name of its secretary or of an officer of the body duly appointed for that purpose; and

(iii) does not have its head office or principal place of business in Australia.

APPLICATION TO YOUR CIRCUMSTANCES

TEST TIME

70.   For the purposes of this ruling, the 'test time' for determining if Company A is a qualifying ESIC, will be upon the issue of qualifying shares on a particular date or dates on or after x XX 20XX and on or before yy YY 20YY.

Current year

71.   Therefore, for the purposes of subsection 360-40(1) ITAA 1997, the current year will be the year ending yy YY 20YY (the 20YY income year). For clarity, in relation to particular requirements within subsection 360-40(1), the last 3 income years will include the years ending yy YY 20YY, 20XX and 20ZZ, and the income year before the current year will be the year ending yy YY 20XX (the 20XX income year).

THE 'EARLY STAGE TEST' - PARAGRAPHS 360-40(1)(a) - (d) ITAA 1997

Incorporation or Registration - paragraph 360-40(1)(a) ITAA 1997

72.   Company A was incorporated in XYZ on xx YY 20XY, which is within the 3 income years outlined above, therefore the requirements of subparagraph 360-40(1)(a)(i) are satisfied.

Total expenses - paragraph 360-40(1)(b) ITAA 1997

73.   In applying the requirements of paragraph 360-40(1)(b), Company A and any of its 100% subsidiaries must have incurred total expenses of $1 million or less in the 20XX income year, being the income year before the current year.

74.   Company A incurred expenses of $xxx in the 20XX income year. Consequently, paragraph 360-40(1)(b) is satisfied.

Assessable income - paragraph 360-40(1)(c) ITAA 1997

75.   In applying the requirements of paragraph 360-40(1)(c), Company A and any of its 100% subsidiaries must have derived total assessable income of $200,000 or less in the 20XX income year, being the income year before the current year.

76.   Company A earned assessable income of $yyy in the 20XX income year. Consequently, paragraph 360-40(1)(c) is satisfied.

No Stock Exchange listing - paragraph 360-40(1)(d) ITAA 1997

77.   In applying the requirements of paragraph 360-40(1)(d), Company A must not be listed on any Stock Exchange in Australia or a foreign country at the test time.

78.   Company A is not listed on any Stock Exchange in Australia or a foreign country at the test time, so paragraph 360-40(1)(d) is satisfied.

CONCLUSION FOR EARLY STAGE TEST

79.   Company A satisfies the early stage test for the 20YY income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.

THE '100 POINT TEST' - PARAGRAPH 360-40(1)(e) AND SECTION 360-45

80.   Company A has not provided sufficient evidence of satisfying the 100 point test under section 360-45 for the year ending yy YY 20YY. Company A are electing to seek eligibility by satisfying the Principles-based Innovation test under section 360-40(1)(e)(i)-(v), in order to be issued with a Private Binding Ruling.

THE 'PRINCIPLES-BASED TEST' - PARAGRAPH 360-40(1)(e) ITAA 1997

Developing new or significantly improved innovations for applicable addressable market - subparagraph 360-40(1)(e)(i) ITAA 1997

81.   In applying the requirements of subparagraph 360-40(1)(e)(i), Company A must be developing an innovation (product, process, service or organisational method) which is either new or significantly improved for an applicable addressable market.

82.   Company A is developing an improved service and organisational method in a particular industry. The organisational method being developed, combined with specialised technology, is a significant step forward in the Australian market, which will significantly reduce the cost of certain procedures and allow individuals to access previously expensive services.

83.   The innovative service and organisational method will limit its services to those often seen as more complex. Previously, such services have only been provided by certain outlets.

84.   The reduced offering allows Company A to streamline all of the processes throughout the organisation. Further to this, the number of products to order, amount of training required, and the breadth of procedural complications are vastly reduced.

85.   In addition, staff members are trained to operate specialised equipment.

86.   Company A is developing this organisational method which allows services to be provided to customers without first requiring a referral from another service provider.

87.   Company A is developing their organisational method to address a number of discrete markets and is continuing to develop their organisational method.

88.   Company A is genuinely focussed on developing their organisational method for an applicable addressable market.

Genuinely focussed on developing for commercialisation - subparagraph 360-40(1)(e)(i) ITAA 1997

89.   In applying the requirements of subparagraph 360-40(1)(e)(i), Company A must be genuinely focussed on developing an innovation for a commercial purpose in order to generate economic value and revenue for the company.

90.   There are a number of steps which are required to be completed into the future, before the organisational method is considered to be fully developed for commercialisation:

•         Expansion into further locations and analysing the differences between locations and what challenges, strengths, and differences there are across locations nationwide

•         Further refinement of all administrative processes, including training and documentation, which will be standardised across all locations.

•         Refinement of training processes for staff to ensure they onboard quickly and can work within the Company A model.

•         The marketing and onboarding process for clients.

91.   Company A has established a plan to take the business from research and development, through to a commercially viable operation.

92.   Key to commercialising the investment was testing and determining:

•         Whether bringing the technology in-house was viable

•         The best way to implement the new organisational methods, including how to effectively and efficiently train staff in the new methods; and

•         Understanding the cost drivers in practice, not just in theory, to assess whether the innovation could be commercially viable.

93.      Following this initial rollout, and consolidation into most major cities in Australia, the business plan includes potential further expansion into large coastal/regional towns. The viability of such an expansion will be reassessed once Company A is comfortably established in the major cities.

94.      Company A anticipate that the current programme of development will be completed in the 20ZY financial year.

95.      Company A is genuinely focussed on developing their organisational method for a commercial purpose, so subparagraph 360-40(1)(e)(i) is satisfied for the period x XX 20XX to yy YY 20YY.

High growth potential - subparagraph 360-40(1)(e)(ii) ITAA 1997

96.      In applying the requirements of subparagraph 360-40(1)(e)(ii), Company A must be able to demonstrate that it has the potential for high growth within a broad addressable market.

97.      Company A will grow by attracting clients seeking a high-quality service at a drastically cheaper price point than competitors. The growth will be fuelled by opening outlets throughout the country, gaining access to new markets.

98.      Company A has provided details to satisfy this requirement.

99.      Company A has demonstrated a high growth potential for their organisational method, so subparagraph 360-40(1)(e)(ii) is satisfied for the period x XX 20XX to yy YY 20YY.

Scalability - subparagraph 360-40(1)(e)(iii) ITAA 1997

100.    In applying the requirements of subparagraph 360-40(1)(e)(iii), Company A must be able to demonstrate that it has the potential to successfully scale up the business.

101.    With additional practices, there are a few factors which are expected to result in lower operating costs per client:

•         Marketing expenses are currently quite high. These expenses are necessary to increase brand awareness. As brand awareness increases nationally, word of mouth increases, and marketing efforts across outlets can be consolidated nationally, rather than separate local campaigns.

•         Improved expertise and efficiency of the staff.

•         Centralised preparation of training methods which be rolled out to all outlets resulting in lower training cost per head.

102.    Company A has provided details to satisfy this requirement.

103.    This leverage ensures that Company A has the potential to successfully scale up its business, so subparagraph 360-40(1)(e)(iii) is satisfied for the period x XX 20XX to yy YY 20YY.

Broader than local market - subparagraph 360-40(1)(e)(iv) ITAA 1997

104.    In applying the requirements of subparagraph 360-40(1)(e)(iv), Company A must be able to demonstrate that it has the potential to be able to address a broader than local market, including global markets.

105.    Company A plans to expand nationally. Company A already has sites in XXX and YYY. It is also in the process of opening a practice in ZZZ which is scheduled for late YY 20XY.

106.    In terms of international expansion, Company A is actively targeting individuals who would otherwise seek to have services completed overseas. This is evidenced on the website which compares the service to overseas work.

107.    Company A has provided details to satisfy this requirement.

108.    Company A has demonstrated that it has the capacity to address a broader than local market, so subparagraph 360-40(1)(e)(iv) is satisfied for the period x XX 20XX to yy YY 20YY.

Competitive advantages - subparagraph 360-40(1)(e)(v) ITAA 1997

109.    In applying the requirements of subparagraph 360-40(1)(e)(v), Company A must demonstrate that it has potential to be able to have competitive advantage for that business.

110.    Company A plans to compete with other outlets in the Australian market by offering a better service - as high quality if not higher, in less time, for a lower cost.

111.    There are currently no direct competitors doing what Company A is doing, and should there be any competitors emerge in the coming years, Company A believes it will be able to maintain a competitive advantage in several ways:

•         First to market advantage. Being the first operator in this space, Company A has the opportunity, and is building its brand awareness. When other businesses open, being the first and more trusted name will likely benefit Company A (all other things are equal).

•         Company A has a significant head-start on any competition. Getting the company up and running has had a lot of challenges, and there has been an enormous amount of work put in to refine and improve, as described above. This experience and know-how give Company A a significant advantage over any newcomers to the market.

112.    Company A has provided details to satisfy this requirement.

113.    Company A has demonstrated that it has competitive advantages for its business, so subparagraph 360-40(1)(e)(v) is satisfied for the period x XX 20XX to yy YY 20YY.

CONCLUSION FOR PRINCIPLES BASED TEST

Company A satisfies the principles based test as it has satisfied the requirements within subparagraphs 360-40(1)(e)(i) to (v) for the period x XX 20XX to yy YY 20YY.

Foreign Company Test - subparagraph 360-40(1)(f) ITAA 1997

114.    As Company A was incorporated in Australia, it is not a Foreign Company and paragraph 360-40(1)(f) is satisfied.

CONCLUSION

Company A meets the eligibility criteria of an ESIC under section 360-40 for the period x XX 20XX to yy YY 20YY.

[1] Explanatory Memorandum to the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016, paragraph 1.79.