Edited version of private advice

Authorisation Number: 1052266342747

Date of advice: 26 June 2024

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') for the period 01 July 20YYto 30 June 20YY?

Answer:

Yes.

This ruling applies for the following periods:

Income year ended 30 June 20YY

The Scheme commences on:

1 July 20YY

RELEVANT FACTS AND CIRCUMSTANCES.

Early Stage Test

The Company is an Australian proprietary company incorporated in Australia on XX MM YYYY.

Its equity interests are not listed for quotation in the official list of any stock exchange in Australia or a foreign country, nor will they be listed at any time up to and including 30 June 20XX.

In the income year ended 30 June 20YY, the Company had expenses of $XXXX and it has not derived any assessable income.

Background Facts

The Company has X subsidiaries which were incorporated in MM YYYY. The subsidiaries incurred no expenses and generated no assessable income in the income year ended 30 June 20XX.

The key personnel of the Company have clauses in their contracts preventing them from working for competitors for a certain period of time.

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

The 'test time' for determining if the Company is a qualifying ESIC, will be upon the issue of qualifying shares on a particular date or dates on or after 1 July 20YY, and on or before 30 June 20XX.

The Company issued new shares in the income year ended 30 June 20XX.

Product Development

The Company is developing an innovation.

The Company has identified its immediate addressable domestic market, with a view to expand into international markets (should the product prove to be successful in the domestic market).

Product Development Stages

A timeline of the work already completed and milestones in development of the innovation has been provided.

The Company needs to build a more appropriate technology platform for the innovation.

Commercialisation Strategy

The Company has detailed its commercialisation strategy with an initial offering. This initial offering will be used as a 'beta' test to gather feedback and the product.

Following this phase, the final product will be offered to the broader public, utilising various marketing strategies to reach the target market. Marketing materials will highlight the innovations key differences compared to competitors.

High Growth Potential

There is currently no identical existing product to service this growing market. The Company has identified the closest product offered by a potential competitor and identified high growth potential through their analysis of the target market.

Scale up the Business

Initial product offerings will be funded by planned capital raisings. Once the product is proven to be profitable and has a historical track record, third party lenders will be approached to fund future offerings.

The Company will also hire staff to market and operate the product. Once customers are onboarded, the ongoing overhead allocated to each customer is minimal. Therefore, the product is scalable.

Broader than Local Market

If the product proves successful in the Australian market, the Company will aim to expand into international markets as the core concept of the product will remain unchanged regardless of the market.

Legal documents and terms and conditions associated with the product would need to be updated to facilitate this expansion into international markets.

Competitive Advantages

The Company's marketing materials will highlight the unique features of the product.

The barrier to entry for competitors in this market is very high in Australia. The Australian regulatory environment for this product is one of the strictest in the world. This coupled with the strict requirements for the product gives the Company a significant advantage.

Current potential competitors in the space do not the same features as this product.

CONCLUSION

The Company meets the eligibility criteria of an ESIC under section 360-40 for the period 1 July 20YY to 30 June 20XX.

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