Edited version of private advice

Authorisation Number: 1052229586347

Date of advice: 14 March 2024

Ruling

Subject: Early stage innovation company

Question

Does the taxpayer meet the Early Stage Tests under subsection 360-40(1)(a) to (d) of the Income Tax Assessment Act 1997 (ITAA 1997)?[1]

Answer

Yes.

This ruling applies for the following period:

1 July 20xx to 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

The taxpayer was incorporated in Australia.

The taxpayer interests are not listed for quotation in the official list of any stock exchange at the test time, either in Australia or a foreign country.

The taxpayer earned assessable of less than $200,000 the year before the current year.

The taxpayer's financial statements disclosed a total expense of more than $1 million dollar.

The taxpayer's total expense disclosed in the financial statements included certain expenses for accounting purposes, provisions and reserves.

The taxpayer submitted that if relevant expenses were not incurred in the year before the current year, the incurred total expenses for that year would be less than $1 million.

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

Reasons for decision

Qualifying Early Stage Innovation Company

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

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 its 100% subsidiaries incurred total expenses of $

       iii.                1 million or less; or

       iv.                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 its 100% subsidiaries must have incurred total expenses of $1 million or less in the income year before the current year.

Paragraph 9 of the Taxation Determination 2023/6 Income tax: tax incentives for early stage investors: what is an 'expense' that is 'incurred' for the early stage test? (TD 2023/6) states the word 'expense' has a meaning consistent with the general accounting concept of expense in the context of the early stage investor incentive.

Paragraph 12 of TD 2023/6 states that an amount will be an expense where it results in a decrease in the equity of the potential ESIC, otherwise than by way of distribution to its members.

Paragraph 16 of TD 2023/6 indicates that an expense of for accounting purposes is not necessarily incurred for the purpose of the expense tests in the context of Division 360.

Paragraph 17 of TD 2023/6 states that the early stage test would not include certain provisions and reserves that may be recognised as expense for accounting but which are not incurred.

Paragraph 2 of Taxation Ruling 2008/5 Income tax: tax consequences for a company of issuing shares for assets or for services ('TR 2008/5'), provides that

When a company issues shares as consideration for assets or for services, the issue of its shares is neither a loss nor an outgoing of the company and so not deductible under section 8-1, no matter what the character of the assets or services or their intended use. Nor are the shares issued as expenditure of the company.

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

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)

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.

Application to your Circumstances

Test Time

For the purposes of this ruling, the 'test time' will be upon the issue of qualifying shares on DD YY MMM.

Current year

Therefore, 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 last 3 income years will include the years ending 30 June 20xx, 20xx and 20xx, and the income year before the current year will be the year ending 30 June 20xx (the 20xx income year).

The 'Early Stage Test' - Parapraphs 360-40(1) and (d)

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

The taxpayer was incorporated in Australia 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)

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

The total expenditure in the taxpayer's financial statement for the 20xx income year is more than $1 million, however, the taxpayer must only take into account expenses which have been 'incurred' according to paragraph 16 of TD 2023/6. The amounts reported as expenses for accounting purposes, provisions and reserves were not incurred for the 20xx income year

Conclusion of total expenses for the purpose of paragraph 360-40(1)(b)

The total expenses incurred by the taxpayer in the 20xx income year is less than $1 million. 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), the taxpayer 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 years before the current years.

The taxpayer earned an assessable income less than $200,000 in the 20xx 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), the taxpayer must not be listed on any Stock Exchange in Australia or a foreign country at the test time.

The taxpayer 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

The taxpayer satisfies the early stage test at the test time, as each of the requirements within paragraphs 360-40(1)(a) to (d) have been satisfied.

[1] All future references are to the Income Tax Assessment Act 1997, unless otherwise indicated.