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Edited version of private advice
Authorisation Number: 1052068285969
Date of advice: 12 December 2022
Ruling
Subject: Early stage innovation company qualification
Question 1
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 periods:
Income year ending 30 June 20YY
Income year ending 30 June 20YY
The scheme commences on:
1 July 20YY
Relevant facts and circumstances
1. The Company was incorporated in Australia in 20YY. Its equity interests are not listed for quotation in the official list of any stock exchange.
2. The Company has no subsidiaries.
3. The Company incurred expenditure greater than $1 million total for the years ended 30 June 20YY, 20YY and 20YY.
4. The Company's assessable income was less than $200,000 for each of the years ended 30 June 20YY, 20YY and 20YY.
5. The Company is developing a mobile application (the Innovation) for users to interact with each other based on specific requirements within the addressable market. The Company has identified its ultimate market the global market, with its initial target being international markets including the Australian market.
6. The Company has registered trademarks with IP Australia and the World Intellectual Property Organisation. The Company also owns copyright in its software and databases.
7. The Company has identified its addressable market as specific market segments within a particular industry globally.
8. Key features include:
• Integration of other applications.
• Members have the ability to directly link other memberships into their profile.
• Allows networking of members.
• Facilitation of events to be organised directly through the platform to enable members to meet in real life.
• Allows members to participate in rewards-based games within the platform, unlocking paid features free of charge.
• Allows members to gain access to paid features free of charge once the referral code is shared.
• Adopted a social media style feed which is customised.
• Allows members to be able to transport to any location in the world through their device.
• Enables professionals within the addressable market to monetise their businesses and services through the platform.
• Enables members to integrate their own voice messages into their profile and messages.
• Brand to Consumer (B2C) advertising through brand partnerships, in-app messaging, banners, push notifications and email marketing.
• Business to Consumer (B2C) events. Advertising will be through in-app messaging, direct consumer messaging, push notifications, banners and emails.
• GIFs and videos for messaging.
It is arguable that the concept of a mobile application specific to the addressable market is not a new product. Nonetheless, a consideration of the features of the Innovation as a whole, leads to the conclusion that it is a significant improvement on what was available and is now available in this market.
9. The Innovation was released in 20YY.
10. There have been many different versions of the app since inception.
11. The Innovation is currently available in many countries with planned expansion more globally. Expansion into new markets will have minimal impact on unit costs.
12. The Company states there have been many feature additions that have been undertaken which include:
• Verification of users
• Changing block/report options
• Finding and developing ways to deal with scammers
• Full account deletion in app
• Improved messaging features
• Caching filters
• Reward system
• Delete account character limit
• Reset queue/filters
• Integration of other applications
• Imaging changes
• Rest of world screens
• Help and support to directly email from app
• Deleting and reactivating accounts
• Dragging, reordering, uploading and deleting images
• In app advertising
• Enhancing of onboarding
13. The Company states it has a high growth potential due to the following:
• Growth of more than XX% in the number of its customers and more than XX% in revenue since 20YY
• Downloads achieved
• Paying subscribers continuing to grow
• The Company has demonstrated the ability to grow the number of customers and paying subscribers by more than XX% on average each month since inception
• The Company was self-funded and operated by the founders with investment in MM YYYY
• The Company currently directly employs or contracts a number of individuals
• The Company has been featured in a number of leading Australian and international publications
• Commencement of development of two new features.
14. One feature enables consumers to network.
15. The other feature enables brand business partners of the Innovation to network.
16. The Company has plans for furthering its growth through the following:
• Engage in partnerships at a corporate and franchise level to increase monetisation and user growth
• Increasing the number of active markets within the next X months
• Increasing its total addressable market by leveraging vertical markets
• Expected to achieve X million plus customers by mid-20YY with an excess of XX paying subscribers
• Contracted multiple companies for marketing, development, accounting and legal assistance
• Has gone live with a data and marketing warehouse.
17. The Company says it has low development cost overheads as a result of its focus on a disciplined development approach, high calibre team and focus on data driven decision making.
18. The Company has attracted in excess of $XX in confirmed funding in less than X months from investors.
19. The Company will continue to grow the Innovation's community. They have entered into a major brand partnership.
20. As part of their marketing strategy, the Company has contracted over XX influencers for promotional purposes.
21. The Company are not aware of any competitors within the target market but have provided a comparison analysis.
22. Irrespective of the likelihood of imitation, the Company states it will continue to undertake the following actions to sustain competitive advantage:
• The Innovation presents medium to high switching costs for consumers given there are not current or foreseeable alternatives.
• The Company has recruited and continues to recruit best-in-class team members who have unique technical competency which are unable to be replicated given the finite supply of talent who have had similar prior experience, their current employment status and the ability for potential new entrants to attract the talent.
• The Company has been founded and is currently under leadership by Directors who have unique skill-sets which are unable to be replicated.
• The Company has produced growth and development at XX% the speed of companies within the segment.
• The Company has established itself within the niche as the market leader, with strong awareness of the position within the investor and consumer network, reducing the likelihood of financial investment into any comparable, or potential new entrants into the market.
• The Company has penetrated markets at a rapid pace and will be available more globally within the next X-X months.
• The Company has observed best-in-class customer satisfaction, as evidenced by all key metrics tracked within the segment.
23. In addition to the above, the Company have highlighted the key differentiators as being:
• Low development cost overheads through a disciplined development approach, high calibre team and a data driven decision making focus.
• Low customer acquisition costs
• Experience of founders
• Experience of core team members
• Exclusive social media client of a team of data and marketing analytics experts.
• Currently advised by a number of shareholders
• Not a member of an economic group or have any subsidiaries
• Registered trademarks with Australian Government and World Intellectual Property Organisation
• Owns copyright in software and database (AWS).
Relevant legislative provisions
Section 360-40 of the Income Tax Assessment Act 1997
Reasons for decision
Detailed reasoning
Qualifying Early Stage Innovation Company
1. 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
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:
i. incorporated in Australia within the last three income years (the latest being the current year); or
ii. incorporated in Australia within the last 6 income years (the latest being the current year), and across the last 3 of those income years before the current year it 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).
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 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)
7. 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)
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 point test' - paragraph 360-40(1)(e) and section 360-45
10. 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)
11. 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.
12. 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.
13. The five requirements of the principles-based test, as outlined in paragraph 360-40(1)(e) are:
i. the company is genuinely focused on developing for commercialisation one or more new or significantly improved products, processes, services or marketing or organisational methods; and
ii. the business relating to those products, processes, services or methods has a high growth potential; and
iii. the company can demonstrate that it has the potential to be able to successfully scale that business; and
iv. the company can 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 can demonstrate that it has the potential to be able to have competitive advantages for that business.
Developing new or significantly improved innovations for commercialisation
14. 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..."[1]
15. The innovation being developed by the company must either be new or significantly improved for an applicable addressable market. 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.
16. Improvements must be significant in nature to meet this requirement. 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.
17. The OECD Oslo Manual defines innovations as significant changes, with the intention of distinguishing significant changes from routine minor changes. However, it is important to recognise that an innovation can also consist of a series of smaller incremental changes that together constitute a significant change.[2]
18. In discussing services innovation activity, paragraph 111 of the OECD Oslo Manual states,
"Innovation activity in services also tends to be a continuous process, consisting of a series of incremental changes in products and processes. This may occasionally complicate the identification of innovations in services in terms of single events, i.e. as the implementation of a significant change in products, processes or other methods."
19. 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."
20. The company must be genuinely focused 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.
21. '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
22. The company must be able to demonstrate that it has the potential for high growth 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
23. The company must be able to demonstrate that it has the potential to successfully scale up the business. 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 per unit.
Broader than local market
24. 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
25. 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)
26. At the test time, the company must not be a foreign company within the meaning of the Corporations Act 2001.
27. 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
28. 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 years ending 30 June 20YY and 20YY.
Current year
29. For the purposes of subsection 360-40(1), the current year will be either the year ending 30 June 20YY (the 20YY income year) or the year ending 30 June 20YY (the 20YY income year).
30. The income year before the current year for the 20YY income year will be the year ending 30 June 20YY (the 20YY income year). The income year before the current year for the 20YY income year will be the year ending 30 June 20YY (the 20YY income year).
Early stage test
Incorporation or Registration - paragraph 360-40(1)(a)
We consider the requirements under 360-40(1) of the ITAA 1997 for each individual income year when assessing whether the Company qualifies as an early stage innovation company.
30 June 20YY
31. As the Company was incorporated and registered in 20YY, which occurs within the 20YY income year, it is within the last 3 income years, subparagraph 360-40(1)(a)(i) and (iii) is satisfied, we do not need to consider 360-40(1)(a)(ii).
Total expenses - paragraph 360-40(1)(b)
32. As the Company had expenses of $1 million or less in the prior income year (the 20YY income year) paragraph 360-40(1)(b) is satisfied.
Assessable income - paragraph 360-40(1)(c)
33. As the Company's assessable income in the prior income year (the 20YY income year) is $200,000 or less paragraph 360-40(1)(c) is satisfied.
No stock exchange listing - paragraph 360-40(1)(d)
34. As the Company privately owned and is not listed on any stock exchange in Australia or a foreign country paragraph 360-40(1)(d) is satisfied.
Conclusion on early stage test
35. The Company satisfy the early stage test for the entire 20YY income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.
30 June 20YY
36. As the Company was incorporated and registered in 20YY, which occurs within the 20YY income year, it is within the last 3 income years, subparagraph 360-40(1)(a)(i) and (iii) is satisfied, we do not need to consider 360-40(1)(a)(ii).
Total expenses - paragraph 360-40(1)(b)
37. As the Company had expenses of $1 million or less in the prior income year (the 20YY income year) paragraph 360-40(1)(b) is satisfied.
Assessable income - paragraph 360-40(1)(c)
38. As the Company's assessable income in the prior income year (the 20YY income year) is $200,000 or less paragraph 360-40(1)(c) is satisfied.
No stock exchange listing - paragraph 360-40(1)(d)
39. As the Company is privately owned and is not listed on any stock exchange in Australia or a foreign country paragraph 360-40(1)(d) is satisfied.
Conclusion on early stage test
40. The Company will satisfy the early stage test for the entire 20YY income year, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.
100 point innovation test
41. As an alternative to satisfying the principle-based test for a qualifying ESIC, a company may be a qualifying ESIC if it has at least 100 points for meeting certain objective innovation criteria. The 100 point test is provided as an alternative innovation test providing the company with a self-assessment test. The Company does not satisfy the 100 point test, therefore we rely on the principles based test.
Principles based test
Developing new or significantly improved innovations for commercialisation - subparagraph 360-40(1)(e)(i)
42. In order to meet the requirements of this subparagraph, there are three interrelated elements that needs to be addressed:
• New, significantly improved, product, process, service or marketing method or organisational method - the Innovation;
• Genuinely focussed on
• Developing for commercialisation.
43. The Company is developing a mobile application (the Innovation) for users to interact with each other based on specific requirements within the addressable market. The Company has identified its ultimate market as the global market, with its initial target being international markets including the Australian market.
44. The Company has registered trademarks with IP Australia and the World Intellectual Property Organisation. The Company also owns copyright in its software and databases.
45. The Company has identified its addressable market as a global specific industry.
46. Key features include:
• Integration of other applications
• Members have the ability to directly link other memberships into their profile
• Allows networking of members
• Facilitation of events to be organised directly through the platform to enable members to meet in real life
• Allows members to participate in rewards-based games within the platform, unlocking paid features free of charge
• Allows members to gain access to paid features free of charge once the referral code is shared
• Allows members to be able to transport to any location in the world through their device
• Adopted a social media style feed which is customised
• Enables professionals within the addressable market to monetise their businesses and services through the platform
• Enables members to integrate their own voice messages into their profile and messages
• Brand to Consumer (B2C) advertising through brand partnerships, in-app messaging, banners, push notifications and email marketing
• Business to Consumer (B2C) events. Advertising will be through in-app messaging, direct consumer messaging, push notifications, banners and emails.
• GIFs and videos for messaging
It is arguable that the concept is not a new product. Nonetheless, a consideration of the features as a whole, leads to the conclusion that it is a significant improvement on what was available and is now available in this market.
Genuinely focussed on developing for commercialisation - subparagraph 360-40(1)(e)(i)
47. The Company has taken the following steps in developing the Innovation:
• Market research
• The Innovation was released in 20YY
• The Innovation has had excess of over XX downloads, more than XX paying subscribers every month and revenue through 'business to business' partnerships. All metrics were achieved within X months of inception
• There is also a website.
48. There have been many different versions of the app since inception.
49. The Innovation is currently available in many countries with planned expansion more globally. Expansion into new markets will have minimal impact on unit costs.
50. The Company states there have been many feature additions that have been undertaken, including:
• Verification of users
• Changing block/report options
• Finding and developing ways to deal with scammers
• Full account deletion in app
• Improved messaging features
• Caching filters
• Reward system
• Delete account character limit
• Reset queue/filters
• Integration of other applications
• Imaging changes
• Rest of world screens
• Help and support to directly email from app
• Deleting and reactivating accounts
• Dragging, reordering, uploading and deleting images
• In app advertising
• Enhancing of onboarding
51. The Company will continue to develop contracts with partnering businesses and potential customers to increase direct sales.
52. The Company has attracted in excess of $XX in confirmed funding in less than X months from investors.
53. Through its commercialisation and marketing strategy, the Company hopes to foster widespread use of its product.
54. The Company has been featured in a number of leading Australian and international publications.
Conclusion on subparagraph 360-40(1)(e)(i)
55. The Company is genuinely focussed on developing the Innovation for a commercial purpose and the Innovation will be a significantly improved product compared to existing products.
56. Therefore, subparagraph 360-40(1)(e)(i) will be satisfied for the period from 1 July 20YY until 30 June 20YY.
High growth potential - subparagraph 360-40(1)(e)(ii)
57. The Company states it has a high growth potential due to the following:
• Growth of more than XX% in the number of its customers and more than XX% in revenue since 20YY
• Since launching over X months ago, in excess of XX downloads have been achieved
• The platform currently has more than XX paying subscribers which continue to grow each month
• The Company has demonstrated the ability to grow the number of customers and paying subscribers by more than XX% on average each month since inception
• The Company was self-funded and operated by the founders with investment in MM YYYY
• The Company currently directly employs or contracts a number of individuals
• The Company has been featured in a number of leading Australian and international publications
• Commencement of development of two new features.
58. One feature enables consumers network.
59. The other feature enables brand business partners to network.
60. The Company has plans for furthering its growth through the following:
• Engage in partnerships at a corporate and franchise level to increase monetisation and user growth
• Increasing the number of active markets within the next X to X months
• Increasing its total addressable market by leveraging vertical markets
• Expected to achieve X million plus customers by mid-20YY with an excess of XX paying subscribers
• Contracted multiple companies for marketing, development, accounting and legal assistance
• Has gone live with a data and marketing warehouse.
61. The Company says it has low development cost overheads as a result of its focus on a disciplined development approach, high calibre team and focus on data driven decision making.
62. The Company is developing the Innovation themselves, they will continue to make their revenue through monthly paying subscriptions and business to business partnerships.
63. As part of their marketing strategy, the Company has contracted over XX influencers for promotional purposes.
64. As the Innovation is already available to consumers, the Company has the ability to increase sales online. This will be done through additional in-app purchasing options, optimisation of its subscription opt-in and pricing revisions.
65. The Company expects the Innovation to appeal to a niche sub-market within the specific industry. The Company says this aids decision making and is particularly useful when assessing product or service viability in particular markets.
66. The Company has demonstrated that the Innovation has high growth potential. Therefore, subparagraph 360-40(1)(e)(ii) will be satisfied.
Scalability - subparagraph 360-40(1)(e)(iii)
67. The Company's projections illustrate the increase in projected sales. Monthly recurring revenue increases by over $XX from inception.
68. The Company will continue to grow the Innovation's community. They have entered into a major brand partnership.
69. The Company expects a total user base of over X million users.
70. Given that the Innovation will be available globally, it is expected that the Company has the potential to successfully scale up its business.
71. The Company have low development cost overheads as a result of its focus on a disciplined development approach, high calibre team and focus on data driven decision making.
72. Although there are expenses that will increase in proportion to the growth of the Company's business, expansion into new markets will have minimal impact on unit costs, meaning there is operating leverage that provides the potential for the Company to successfully scale up its business. Therefore, subparagraph 360-40(1)(e)(iii) will be satisfied.
Broader than local market- subparagraph 360-40(1)(e)(iv)
73. The Innovation is currently available in multiple countries, with expansion intended.
74. The Innovation can be used worldwide by most users. Thus, the ultimate addressable market is on a global scale and is not confined to a local city, area or region.
75. The Company has demonstrated the Innovation has the potential to address a broader market than just the local market, including international markets. Therefore, subparagraph 360-40(1)(e)(iv) will be satisfied.
Competitive advantages - subparagraph 360-40(1)(e)(v)
76. The Company are not aware of any competitors within the target market but have provided a comparison analysis.
77. Irrespective of the likelihood of imitation, the Company states it will continue to undertake the following actions to sustain competitive advantage:
• The Innovation presents medium to high switching costs for consumers given there are not current or foreseeable alternatives.
• The Company has recruited and continues to recruit best-in-class team members who have unique technical competency which are unable to be replicated given the finite supply of talent who have had similar prior experience, their current employment status and the ability for potential new entrants to attract the talent.
• The Company has been founded and is currently under leadership by Directors who have unique skill-sets which are unable to be replicated.
• The Company has produced growth and development at XX% the speed of companies within the segment.
• The Company has established itself within the niche as the market leader, with strong awareness of the position within the investor and consumer network, reducing the likelihood of financial investment into any comparable, or potential new entrants into the market.
• The Company has penetrated markets at a rapid pace and will be available more globally within the next X-X months.
• The Company has observed best-in-class customer satisfaction, as evidenced by all key metrics tracked within the segment.
78. In addition to the above, the Company have highlighted their key differentiators as being:
• Low development cost overheads through a disciplined development approach, high calibre team and a data driven decision making focus
• Low customer acquisition costs
• Experience of founders
• Experience of core team members
• Exclusive social media client of a team of data and marketing analytics experts
• Currently advised by a number of shareholders
• Not a member of an economic group or have any subsidiaries
• Registered trademarks with Australian Government and World Intellectual Property Organisation
• Owns copyright in software and database (AWS).
79. Whilst the Company believes they have no competitors, it is arguable that the concept is not a new product. Nonetheless, the Company does seem to have a competitive advantage over current and potential market participants for the reasons outlined above. Therefore, subparagraph 360-40(1)(e)(v) will be satisfied.
Conclusion on principles test
80. Whilst it is arguable that the concept is not a new product, consideration of the features of the Innovation as a whole, leads to the conclusion that it is a significant improvement on what was available and is now available in this market. Therefore, the Company through the Innovation are offering a significantly improved product to the target market which is significant enough an improvement to satisfy the principles based test.
81. The Company satisfied the principles based test as it satisfied the requirements within subparagraphs 360-40(1)(e)(i) and (v) for the period commencing 1 July 20YY until 30 June 20YY.
Foreign Company Test
82. As the Company was incorporated in Australia it is not a Foreign Company and paragraph 360-40(1)(f) is satisfied.
Conclusion
83. The Company does meet the eligibility criteria of an ESIC under section 360-40 for the period commencing 1 July 20YY until 30 June 20YY.
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[1] See Explanatory Memorandum to the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016, paragraph 1.76.
[2] OECD Oslo Manual, paragraph 124 and paragraph 151.