Edited version of private advice

Authorisation Number: 1052267790370

Date of advice: 28 June 2024

Ruling

Subject: Eligible accelerator program for early stage innovation company

Question

Does the accelerator program, run by Company X meet the requirements of an eligible accelerator program for the purposes of item 4 of the table in subsection 360-45(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following periods:

Year ending DD MM YYYY

Year ending DD MM YYYY

Year ending DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

1.            Company X has run an accelerator program ('the Program') in Australia since MM YYYY.

The Program

2.            Applications to the Program are free.

3.            The recruitment process following the application comprises at least three rounds of merit-based screening interviews to determine suitability and cultural fit for the program.

4.            Following the recruitment process, the top applicants are selected and invited to participate in the Program. Their participation in the program requires full attention, and Company X do not accept applicants or professionals on a part-time basis.

5.            The Program extends over a period of three months and concludes with an Investment Committee where cohorts pitch to secure pre-seed investment. Company X then continue to directly support successful investments for an additional two months.

6.            The Program aims to support cohorts in the following ways (as detailed below):

a)    Formation and validation phase;

b)    Due diligence phase;

c)    Secure pre-seed investment;

d)    Join the Company X portfolio;

e)    Time-limited support;

f)     Six-month minimum period; and

g)    Prior completion by a cohort of entrepreneurs.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 section 360-40

Income Tax Assessment Act 1997 section 360-45

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise indicated.

Question

Summary

The accelerator program delivered by Company X meets the requirements of an eligible accelerator program for the purposes of item 4 of the table in subsection 360-45(1).

Detailed reasoning

7.            In determining whether a company is an early stage innovation company (ESIC) under paragraph 360-40(1), the company must have at least 100 points under section 360-45 or meets the requirements set down in subparagraphs 350-40(1)(i) to (v).

8.            In respect of the 100 points, 50 points are available under item 4 of the table in subsection 360-45(1) if a company has:

a)    completed or is undertaking an accelerator program that:

                              i.        provides time-limited support for entrepreneurs with start-up businesses; and

                             ii.        is provided to entrepreneurs that are selected in an open, independent and competitive manner; and

b)    the entity providing that program has been providing that, or other accelerator programs for entrepreneurs, for at least 6 months; and

c)    such programs have been completed by at least one cohort of entrepreneurs.

9.            As such, the program must meet the general definition of an accelerator program in addition to the specific conditions listed above.

10.         Accelerators are a relatively new type of organisations. Essentially, an accelerator is a type of organisation that assist new ventures by providing accelerator programs.

11.         Accelerator programs are designed to help cohorts of new ventures with the venture process, which includes defining and building their initial products, identifying promising customer segments and securing resources (both capital and employees). They may be either for-profit or non-profit, but regardless, the programs usually provide a small amount of seed capital and working space. The offer significant networking, educational and mentorship opportunities with both peer ventures and mentors (who may be successful entrepreneurs, program graduates, venture capitalists, angel investors, or corporate executives).

12.         Accelerator programs are of fixed term and limited-duration, typically running for three to six months. In the initial stages, the structure and content of the program is likely to be common across the cohort, before diversifying to a more customised and unstructured format tailored to the needs of the individual start-ups.

13.         It is not sufficient for a program to simply meet the accepted definition of an accelerator program in order for start-ups that undertake the program to be eligible for 50 points. The program must also be an eligible accelerator program, as per item 4 of the table in subsection 360-45(1).

14.         The Explanatory Memorandum ('EM') to Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 provides guidance on what is considered an eligible accelerator program for the purposes of item 4 of the table in subsection 360-45(1) when it states at paragraph 1.95:

...An eligible accelerator programme is a programme that provides time-limited support for start-ups, for which an open, independent and competitive application process is required for entry, provided the entity running that programme has been operating for at least a six month period and has provided a complete programme of this kind to at least one cohort of entrepreneurs. Accelerator programmes that cannot provide value adding support (mentorship, training, education and networks) to the accepted companies or have had no successful companies coming through the programme are unlikely to be effective accelerator programmes.

15.         The EM guidance in conjunction with the legislation points to five factors that an accelerator program must satisfy to be considered an eligible accelerator program. These are:

1. A merit-based screen process - Entry into an accelerator program must involve a merit-based screening process, where entry into the program is determined by an open, competitive validation process. Programs that offer entry based predominantly upon payment of a fee would not qualify.
2. The company, not an individual, must complete the program - In some instances it is the founder of a company that is registered to undertake an accelerator program. In order to satisfy the requirements of subsection 360-45(1) the company itself must receive certification upon completion of the program.
3. Time-limited support - The limited duration is the characteristic that most clearly defines accelerator programs. Generally speaking, a program will run for approximately three to six months.
4. Six month minimum period - The accelerator must have been providing accelerator programs for a minimum of six months at the test time (when the potential ESIC issues shares to the investor). This is not limited to the particular program being considered under the 100-point innovation test, but can include any accelerator program provided by the accelerator.
5. Prior completion by a cohort of entrepreneurs - To qualify as an eligible accelerator program, at least one cohort of entrepreneurs must have completed either that particular program, or another program offered by the accelerator. The term 'cohort' refers to a group or batch and is not merely one or two entrepreneurs.

Application to your circumstances

16.         For the purposes of this ruling, Company X's program must satisfy two overarching requirements:

a)    It is an accelerator program in accordance with the accepted definition; and

b)    It is an eligible accelerator program in accordance with item 4 of the table in subsection 360-56(1).

Accelerator Program

17.         Accelerators are organisations that offer a range of support services and funding opportunities for start-ups. Accelerators have been identified as having five defining, partially interdependent features; seed funding, cohort based, co-location, a structured program and mentoring.

18.         As detailed in the Company X's Program Agreement, the accelerator program provides co-working office space, potential introductions to co-founders, employees, relevant service providers, customers and suppliers and support partners, advisors and/or experts within the ecosystem, regular and ad-hoc training and if selected, the chance to present to potential investors as part of your formal events and Investment Platform.

19.         This purpose clearly fits with the accepted characteristics of an accelerator program, being to assist cohorts of new ventures to define and build their initial products and identify promising customer segments.

Eligible Accelerator program

20.         Each of the five features that an accelerator program must satisfy to be considered an eligible accelerator program in accordance with item 4 of the table in subsection 360-45(1) will be examined in turn.

Merit-based screening process

21.         Company X accept a number of applications of aspiring founders into every program.

22.         Following the recruitment process, Company X select the top applicants and invite them to participate in the Program. Participants' full attention is required.

23.         Company X do not accept professionals on a part-time basis.

24.         Company X accept both individual and companies with individuals required to form companies in the first four to six weeks of the program. No individuals are allowed to pitch to the Investment Committee and Company X do not invest in individuals.

25.         It is accepted that Company X's Program satisfies the merit-based screening process requirement.

The company, not an individual, must complete the program

26.         Company X have satisfied this factor as only companies complete the Program.

Time-limited support

27.         Generally, time-limited support will mean a program lasting between three to six months. The broadly accepted length of three to six months is considered indicative only. It is designed to provide guidance rather than be a definitive rule.

28.         Company X's Program conforms with the generally accepted timeframe.

29.         The Program is of a sufficiently short time period as to be intensive enough that both failure and success are accelerated. The program is in effect designed for failure and success to occur in an accelerated fashion, thus eliminating companies less likely to be successful in the longer term. A necessary component of this process is the time-limited nature of the program.

30.         Company X's Program satisfies this factor in providing time-limited support.

Six-month minimum period

31.         Company X have been running your Program since YYYY.

32.         Company X meet the requirement of providing accelerator Programs for a minimum period of six months.

Prior completion by a cohort of entrepreneurs

33.         Company X have had XX cohorts complete the Program which has resulted in having invested and supported more than XXX companies since MM YYYY.

34.         Company X satisfy the requirement that you have at least once cohort of entrepreneurs previously complete one of your accelerator Programs.

Conclusion

35.         Company X's accelerator Program is an accelerator program according to the accepted definition. In addition, the program meets the features of an eligible accelerator program according to item 4 of the table in subsection 360-45(1).