Edited version of private advice

Authorisation Number: 1052066760032

Date of advice: 8 December 2022

Ruling

Subject: Early stage innovation company

Question

Does the company meet the criteria of an Early Stage Innovation Company (ESIC) under subsection 360-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.            The company was incorporated on Date X. Its equity interests are not listed for quotation in the official list of any stock exchange.

2.            In the previous income year the company had expenses of $X and assessable income of $X.

3.            The company is developing a product and information that details its development was provided.

4.            The company is developing new technology in its addressable market.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 318(2)

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 section 360-40

Income Tax Assessment Act 1997 subsection 360-45(1)

Reasons for decision

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

Summary

The company meets the eligibility requirements of an ESIC under subsection 360-40(1).

Detailed reasoning

Qualifying ESIC

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

2.             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)

3.             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:

•         incorporated in Australia within the last 3 income years (the latest being the current year), or

•         incorporated in Australia within the last six income years (the latest being the current year), and across the last three of those income years the company and its 100% subsidiaries incurred total expenses of $1 million or less, or

•         registered in the Australian Business Register (ABR) within the last 3 income years (the latest being the current year)

4.             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.

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

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

6.             To meet the requirement in paragraph 360-40(1)(b), the company and its 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)

7.             To meet the requirement in paragraph 360-40(1)(c), the company and its 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)

8.             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

9.             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 Points test paragraph 360-40(1)(e) and subsection 360-45(1)

10.          To meet the requirements of subsection 360-45(1) the company must have 100 points at a particular time (the test time) in an income year (the current year) as mentioned in an item of the table if that item applies to the company at that time.

Research and development (R&D) claims above a certain threshold (item 1)

11.          A company will be awarded 75 points if it has at least 50 per cent of its total expenses for the previous income year constituting expenses which are eligible for the tax offset for R&D activities provided under Division 355.

R&D claims above a certain threshold (item 3)

12.          A company will be awarded 15 points if it has at least 15%, but less than 50%, of the company ' s total expenses for the previous income year which are eligible for the tax offset for R&D activities provided under Division 355.

Received an Accelerating Commercialisation Grant (item 2)

13.          A company will be awarded 75 points if, at any time, it has received an Accelerating Commercialisation Grant under the Accelerating Commercialisation element of the Commonwealth's Entrepreneurs' programme

Completed or undertaking eligible accelerator programme (item 4)

14.          A company will be awarded 50 points if it is undertaking or has completed an eligible accelerator programme:

•         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

Third party has previously invested at least $50,000 (item 5)

15.          A company will be awarded 50 points under item 5 of the table in subsection 360-45(1) where:

•         a total of at least $50,000 has been paid for equity interests that are shares in the company.

•         the company issued those shares to one or more parties that were not associates of the company immediately before the issue of those shares.

•         to one or more of those parties the parties did acquire those shares primarily to assist another entity become entitled to a tax offset (or a modified CGT treatment) under Subdivision 360-A, and

•         the company issued those shares at least one day before the test time

Holds certain enforceable intellectual property rights (item 6)

16.       A company will be awarded 50 points if it has one or more enforceable rights on an innovation:

•         a standard patent granted in Australia in the last five years

•         a plant breeder's right that has been granted in Australia in the last five years, or

•         an equivalent intellectual property right granted in another country.

Holds certain enforceable intellectual property rights (item 7)

17.          A company will be awarded 25 points if it has

•         one or more enforceable rights on an innovation through an innovation patent or design right or an equivalent intellectual property right granted in another country.

•         where the property right relates to an innovation patent or foreign equivalent, the right must have been granted and certified within the last 5 years.

•         where the property right relates to a design or foreign equivalent, it must have been registered within the last 5 years.

Collaborative agreement with research organisation or university to commercialise an innovation (item 8)

18.          A company will be awarded 25 points if it has a written agreement to co-develop and commercialise an innovation with either:

•         an institution or body listed in Schedule 1 to the Higher Education Funding Act 1988, or

•         an entity registered under section 29A of the Industry Research and Development Act 1986.

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

19.          At the test time, the company must not be a foreign company within the meaning of the Corporations Act 2001.

20.          The dictionary in section 9 of the Corporations Act 2001 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

21.          For the purposes of this ruling, the test time for determining if the company is a qualifying ESIC will be a particular date during the income year ending 30 June 20XX.

Current year

22.          For the purposes of subsection 360-40(1), the current year will be the year ending 30 June 20XX (the 20XX income year). For clarity, in relation to particular requirements within subsection 360-40(1), the income year before the current year will be the year ending 30 June 20XX (the 20XX income year).

Early stage test

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

23.          The company was incorporated on the XX day of the XX month, 20XX, which is within the last 3 income years, the requirement in subparagraph 360-40(1)(a)(i) is satisfied.

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

24.          As the company had expenses less than $1 million in the prior income year, the requirement in paragraph 360-40(1)(b) is satisfied.

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

25.          As the company's assessable income for the prior income year is less than $200,000, the requirement in paragraphs 360-40(1)(c) is satisfied.

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

26.          As the company not listed on any stock exchange in Australia or a foreign country, the requirement in paragraph 360-40(1)(d) is satisfied.

Conclusion on early stage test

27.          The company will satisfy the early stage test for the entire 20XX income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.

100 Points test in paragraph 360-40(1)(e) and subsection 360-45(1)

28.          To meet the requirements of subsection 360-45(1) the company must have acquired 100 points at a particular time (the test time) in an income year (the current year) as mentioned in an item of the table if that item applies to the company at that time.

29.          The company has applied the following items from Table 1, subsection 360-45(1):

•         Item 5, Third party has previously invested at least $50,000

•         Item 6, Holds certain enforceable intellectual property rights.

Third party prior investment $50,000 - item 5 in the table in subsection 360-45(1)

30.       A company will be awarded 50 points under item 5 of the table in subsection 360-45(1) where:

•         a total of at least $50,000 has been paid for equity interests that are shares in the company

•         the company issued those shares to one or more parties that were not associates of the company immediately before the issue of those shares

•         to one or more of those parties the parties did acquire those shares primarily to assist another entity become entitled to a tax offset (or a modified CGT treatment) under Subdivision 360-A, and

•         the company issued those shares at least one day before the test time.

At least $50,000 has been paid for equity interests that are shares in the company

31.          The company has received at least $50,000 from an unrelated third party.

Parties were not associates of the company immediately before the issue of those shares

32.          An associate of a company is defined under subsection 318(2) of the Income Tax Assessment Act 1936 (ITAA 1936).

33.          According to the company, they issued shares to investors that were not an associate (within the meaning of section 318 of the ITAA 1936) of the company immediately before the issue of those shares.

Acquire shares primarily to assist another entity become entitled to the tax incentives

34.          According to the company the investor did not acquire these shares to assist another entity to become entitled to a tax offset or modified CGT treatment under the ESIC rules.

The company issued those shares at least one day before the test time

35.          The company issued shares to the investor on the XX of XX, 20XX. which is at least one day before the test time.

Conclusion Item 5

36.          The company can apply the 50 points as it satisfies each of the requirements listed in item 5 of table in subsection 360-45(1).

Intellectual property rights- item 6 in table, subsection 360-45(1)

37.          A company will be awarded 50 points if it has one or more enforceable rights on an innovation as a patentee, or licensee of a standard patent granted and certified in Australia in the last 5 years; or the company has equivalent rights under a foreign law.

38.          As the company has been granted exclusive licence to an international patent, it can apply the 50 points

Conclusion on the 100 points test

39.          The company satisfies the 100 points test as it satisfies the requirements in items 5 and 6 of the table in subsection 360-45(1).

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

40.          As the company was incorporated in Australia it is not a Foreign Company and satisfies the requirements within paragraph 360-40(1)(f).

Conclusion

41.          The company satisfies the criteria of sections 360-45 and 360-40, as it meets the eligibility criteria of an ESIC for the period commencing 1 July 20XX until 30 June 20XX.