Edited version of private advice

Authorisation Number: 1052237848852

Date of advice: 4 April 2024

Ruling

Subject: Early stage innovation company eligibility

Question:

Does Company X 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 ruling applies for the following periods:

DD MM YYYY to DD MM YYYY

The Scheme commences on:

DD MM YYYY

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Early Stage Test

1.    Company X is an Australian proprietary company incorporated in XXX on DD MM YYYY.

2.    For the financial year ending DD MM YYYY, Company X incurred and earned the following:

•                     Total expenses of $xxx

•                     Total income of $yyy

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

Background Facts

4.    Company X has no wholly or partly owned subsidiaries. Company X is not part of an income tax consolidated group.

5.    Company X's director is Taxpayer A.

6.    Company X's registered office and principal place of business is situated at XXX.

7.    Company X is not a foreign company within the meaning of the Corporations Act 2001 (Cth).

8.    The 'test time' for determining if Company X 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. Company X made an interim issue of shares on DD MM YYYY (the test date).

Product Development

9.    Company X is a start-up business engaged in farming XXX (a seafood product) and, to Company X's knowledge, it has successfully developed the world's first XXX. Company X is focused on developing its technology for commercialisation. The technology is a completely new process in the farming of XXX which will significantly improve farming methods and yields.

10. Company X sought to raise $xxx and has made an interim issue of shares on DD MM YYYY (the test date).

11. Company X currently holds the intellectual property of the systems and processes developed over the past 24 months. A patent has been explored although due to the long process and the requirement to publish their technology manuals publicly, Company X have decided not to seek a patent. Instead Company X will hold IP internally and divide staff duties so that not one person (other than the founder) is privy to all aspects of the process.

Product Development Stages

12. Company X has a staged operational plan that is based on developing knowledge and technology at a small scale prior to large scale implementation. This is evident by the research and development that has already been completed in the XXX space. To truly capitalise on Company X's XXX breakthroughs, Company X need to vertically integrate a farming operation. Company X's farming operation proposal would be capital intensive and be undertaken in three key stages.

Commercialisation Strategy

13. The technology being developed by Company X provides two key commercialisation benefits:

•                     It opens a new market segment for the sale of XXX;

•                     It removes the barriers of XXX and makes it possible to scale farming at an industrial level.

14. Successfully grown XXX produced during Company X's R&D phase have been sold to farmers and now the company needs to scale the size of the XXX to meet market demand.

15. Existing farmers have rapidly adopted the product with one farming business (XXX) abandoning its own efforts to produce the technology, instead choosing to purchase XXX from Company X.

16. Company X has commenced development of a downstream farming operation to capture additional value-add. Company X sought to raise $xxx and has made an interim issue of shares on DD MM YYYY (the test date). Together with expected grants pursuant to the Research and Development Tax incentive, Company X anticipate having approximately $xxx which will be used to develop a pilot farm at XXX.

17. The pilot farm will become the largest XXX farm in Australia within two years and will provide a pathway for Company X to scale farming operations up to xxx in the medium-term future.

High Growth Potential

18. Company X's technology and Company X's associated business have high growth potential. Global market demand continues to increase for both XXX and XXX.

19. More specifically, Company X is able to estimate its farming yields using industry standard outputs. Company X's forecasts indicate that over the next x-xx years it will be able to grow from an estimated yield of xx tonnes annually to xx tonnes. Annual sales revenue is expected to grow from $xx to $xx during this period.

Scale up the Business

20. Company X has solved the XXX problem for XXX by becoming the world's first successful XXX where other businesses have failed. This success points to the potential of the founders and company to scale the business.

21. Company X's founder has xx years' experience. XXX also has strong connections within the industry that will be critical in securing further government grants, recruiting staff and working with industry partners.

22. Demand is not only domestic but international with existing farms receiving monthly orders that they could not fill with a whole year's production.

23. Separately, as at the test date, the company has raised capital to 1) increase the scale of its XXX and 2) build its farming operation - both of which demonstrate the potential of Company X to successfully scale its business.

24. As outlined above, Company X's forecasts indicate that over the next x-xx years it will be able to grow from an estimated annual yield of xx tonnes to xx tonnes. Annual sales revenue is expected to grow from $xx to $xx during this period.

Broader than Local Market

25. The market for XXX domestically, as well as overseas, is significant.

26. Strong domestic demand for XXX also exists.

27. Company X has already received inquiries from global markets about the possibility of supplying product. Company X plans to investigate markets in person through XXX to establish relationships and better understand shipping and import regulations.

Competitive Advantages

28. Unlike other companies in Australia who have attempted to solve the XXX problem for XXX without success, Company X's technology provides a competitive advantage.

29. Company X is developing their technology to address a number of discreet markets and is continuing to develop their Product.

30. Company X's technology has been identified as having an international addressable market.

Information provided

31. You have provided a number of documents containing detailed information in relation to Company X's Product, including:

•                     your Private Binding Ruling ('PBR') Application dated DD MM YYYY.

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

33. Company X has made an interim issue of shares on DD MM YYYY to various investors to assist in funding the continued development and commercialisation of their Product.