Edited version of private advice

Authorisation Number: 1052219244987

Date of advice: 6 February 2024

Ruling

Subject:Early stage innovation company

Question

Does Company A (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 DD MM YYYY to DD MM YYYY?

Answer

Yes

This private ruling applies for the following period:

DD MM YYYY to DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Background information

Company A is an Australian proprietary company incorporated in V on DD MM YYYY and registered with ASIC in the Australian Business Register (ABR) on DD MM YYYY.

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.

Company A is not a subsidiary of another company. Company A does not have any subsidiaries or hold any equity interests in underlying companies or trusts.

Company A did not earn any income or incur any expenses for the year ending DD MM YYYY.

Company A is undertaking development to become the major producer of sustainable Product.

Product development

XXXX Program commenced in YYYY as a collaboration between xxxx major Producers, with the goal of producing green technologies.

Company A was established to be the exclusive license technology holder to further develop and scale up the New technology & process.

Company A is scaling a technology.

Company A is developing and commercialising a patented technology that produces a Product.

Company A is ready for commercial manufacture of the 'first-of-its-kind' Product to fulfil a currently unmet demand.

Company A uses a cutting-edge self-sustaining P technology. The P technology offers several benefits, including energy efficiency, reduced emissions, faster processing, consistent product quality and versatility. It is the only technology of its kind. Globally, the technology is the most commercially advanced.

Company A's technology is transforming the way the product is produced, making it possible to produce high-quality, sustainable products.

Memorandum of understanding contracts entered into and future planning

Company A has entered into several Memorandum of Understanding (MOU's) contracts to supply its Products to in Australia. Company A has signed a xx-year MOU with JJJ to supply up to XXX tonnes.

With the MOUs in place, Company A is currently completing all required tasks to execute on delivering the product in full, including but not limited to raising capital to commercialise the product, continuing research and development on production technology, sourcing suitable volumes of feedstock to make the volume of product.

Future steps to be undertaken and completed before the product is fully developed:

a.            Raise capital (ESIC Private ruling - MM YYYY).

b.            Secure required feedstock to meet MOU demand (MM YYYY).

c.             Begin construction on Commercial plant (MM YYYY).

d.            Complete construction on commercial plant (MM YYYY).

Current projects being undertaken

Company A has provided the Commissioner with details of its current projects being undertaken.

Genuinely focused on developing significantly improved innovations for commercialisation

Company A has given details demonstrating that it is genuinely focused on developing significantly improved innovations for commercialisation.

High growth potential

Company A demonstrated to the Commissioner that it has high growth potential.

Scalability

The business has demonstrated a potential to successfully scale up.

Broader than local market

Company A has potential to address broader than local market, including global markets.

Competitive advantage

Company A has demonstrated a potential to have competitive advantage for that business.

Sustainability and environmental impact

Company A has demonstrated to the Commissioner that it is committed to minimising its environmental impact, prioritises environmental stewardship and long-term sustainability.

Previous private ruling

On DD MM YYYY, Company A submitted an application for a private ruling to the Commissioner of Taxation seeking ESIC eligibility.

On DD MM YYYY, the Commissioner issued a private ruling for the year ended DD MM YYYY confirming that Company A met the criteria of ESIC under subsection 360-40(1) of the ITAA 1997.

On DD MM YYYY, Company A submitted an application for a private ruling renewal to the Commissioner of Taxation seeking ESIC eligibility renewal.

On DD MM YYYY, the Commissioner issued a private ruling for the year ended DD MM YYYY confirming that Company A met the criteria of ESIC under subsection 360-40(1) of the ITAA 1997.

Information provided

Company provided several documents containing detailed information in relation to its Product.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Company A.

This is to explain how we reached our decision. This is not part of the private ruling.

Question

Does Company A (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 DD MM YYYY to DD MM YYYY?

Summary

Company A meets the eligibility requirements of an ESIC pursuant to subsection 360-40(1) of the ITAA 1997for the period DD MM YYYY to DD MM YYYY.

Detailed reasoning

Qualifying early stage innovation company

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

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)

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).

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.

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

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

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)

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)

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

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

To satisfy the 100 points 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)

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.

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.

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.

Application to your circumstances

Test time

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 DD MM YYYY and on or before DD MM YYYY.

Current year

Therefore, for the purposes of sub paragraph 360-40(1)(a)(i), the 'current year' will be the year ending DD MM YYYY (the YYYY income year). For clarity, in relation to particular requirements within sub paragraph 360-40(1)(a)(i), the last three income years will include the years ended DD MM YYYY, YYYY, YYYY (the latest being the current year), and the year before the current year will be the year ending DD MM YYYY (the YYYY income year).

The early stage test - paragraphs 360-40(1)(a) to (d)

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

Company A was incorporated in Australia on DD MM YYYY, which is within the last three income years; therefore, the requirements of subparagraph 360-40(1)(a)(i) are satisfied.

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

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 YYYY income year, being the income year before the current year.

Company A had a total expense of less than $1 million in the YYYY income year. Consequently, paragraph 360-40(1)(b) is satisfied.

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

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 YYYY income year, income year before the current year.

Company A derived total assessable income of less than $200,000 in the YYYY income year. Consequently, paragraph 360-40(1)(c) is satisfied.

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

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.

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 at the test time, so paragraph 360-40(1)(d) is satisfied.

Conclusion for early stage test

Company A satisfies the early stage test for the YYYY 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

Company A has not provided sufficient evidence of satisfying the 100 point test under section 360-45 for the year ending DD MM YYYY. Company A has elected 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)

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

In applying the requirements of subparagraph 360-40(1)(e)(i), Company A has demonstrated to the Commissioner that it is developing an innovation which is either new or significantly improved for an applicable addressable market.

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

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 to generate economic value and revenue for the company.

Company A had demonstrated that it is genuinely focused on developing significantly improved innovations for commercialisation.

Conclusion on subparagraph 360-40(1)(e)(i)

Company A is genuinely focussed on developing their Product for a commercial purpose, so subparagraph 360-40(1)(e)(i) is satisfied for the period DD MM YYYY to DD MM YYYY. Once the Product has been fully developed, Company A will no longer be 'developing' the product for commercialisation and subparagraph 360-40((1)(e)(i) will no longer be satisfied.

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

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.

Company A has provided details to satisfy this requirement.

Company A demonstrated a high growth potential for their Product, so subparagraph 360-40(1)(e)(ii) is satisfied for the period DD MM YYYY to DD MM YYYY.

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

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.

Company A has provided details to satisfy this requirement.

Company A has the potential to successfully scale up its business, so subparagraph 360-40(1)(e)(iii) is satisfied for the period DD MM YYYY to DD MM YYYY.

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

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.

Company A has provided details to satisfy this requirement.

Company A has demonstrated that it has the capacity to address a broader than local market, including global markets, through that business so subparagraph 360-40(1)(e)(iv) is satisfied for the period DD MM YYYY to DD MM YYYY.

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

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 advantages for that business.

Company A has provided details to satisfy this requirement.

Company A has demonstrated that it has competitive advantages for its business, so subparagraph 360-40(1)(e)(v) is satisfied for the period DD MM YYYY to DD MM YYYY.

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 DD MM YYYY to DD MM YYYY.

Foreign company test -subparagraph 360-40(1)(f)

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

Conclusion

Company A meets the eligibility criteria of an ESIC under section 360-40 of ITAA 1997 for the period DD MM YYYY to DD MM YYYY.