Edited version of private advice

Authorisation Number: 1051533664988

Date of advice: 21 June 2019

Ruling

Subject: Eligible accelerator program

Question

Does the program delivered by the Company 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 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

1 July 2018

Relevant facts and circumstances

1.    The Company has provided a program offered to start-up companies and individuals since 2016.

2.    Entry into the program is decided by a merit-based screening process, including an application and interview

3.    The program is an intensive, structured program running between three to six months and is tailored to those in their industry. Participants receive time-limited support in the form of training, mentoring, education and access to professional service providers and a broad range of networks.

4.    All successful applicants are awarded a scholarship.

5.    The program is cohort based, with a cohort graduating together upon completion.

6.    The program culminates in a Final Pitch Event, where participants pitch to business experts.

7.    Certificates are issued by offers the program to start-up companies and individuals in the name of the individual, or, in instances where a company has already been registered, in the name of both the individual and the company.

8.    Since inception, multiple cohorts have gone on to complete the program.

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.

Summary

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

Detailed reasoning

Eligible Accelerator Program

1.    Under the 100-point innovation test used to determine if a company qualifies as an early stage innovation company (ESIC) in section 360-40, 50 points are available if a company has completed or is undertaking an eligible accelerator program (item 4 of the table in subsection 360-45(1)). The requirements of this test are that, at the test time:

a)    the company has 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.

2.    Accelerators are a relatively new type of organisation. Essentially, an accelerator is a type of organisation that assists new ventures by providing accelerator programs.

3.    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. They 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.

4.    Accelerator programs are run on a fixed 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.

5.    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).

6.    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 programmehas 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.

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

                              i.      A merit-based screening 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.

                             ii.      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.

                            iii.      Time-limited support - the limited duration is the characteristic that most clearly defines accelerator programs. Generally speaking, a program will run for approximately 3 to 6 months.

                           iv.      Six month minimum period - the Accelerator must have been providing accelerator programs for a minimum of 6 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.

                            v.      Prior completion by a cohort of entrepreneurs - 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

8.    For the purposes of this ruling the program must satisfy two overarching requirements:

1)            it is an accelerator program in accordance with the common definition; and

2)            it is an eligible accelerator program in accordance with item 4 of the table in subsection 360-45(1).

Accelerator Program

9.    Participants in the program receive time-limited support in the form of training, mentoring, education and access to professional service providers and a broad range of networks. In addition, offers the program to start-up companies and individuals methodically leads participants through what it takes to turn their ideas into products and services with the aim of demonstrating the process of translating the participants' innovation into a successful business.

10.  These characteristics clearly fit some 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.

11.  In particular, accelerators have been identified as having five defining, partially interdependent features, being: seed funding; cohort based; co-location; a structured program; and mentoring.

Seed funding

12.  The Company offers the program to start-up companies and individuals and does not provide seed funding in exchange for equity in the participating company. However it offers a scholarship to eligible participants.

Cohort-based entry and exit

13.  The program is cohort based, with the cohort all graduating together at the end of the module.

Co-location

14.  Co-location is available to participants if the Company determines that co-location will aid the participant in their progress.

A structured program

15.  The program is of a fixed term and limited-duration. It runs for between three to six months culminating with a pitch presentation and graduation.

Mentoring

16.  The Company provide mentors with a wide range of experience, who volunteer their time.

17.  In short, it is accepted that the program meets the defining characteristics of what is regarded as an accelerator program.

Eligible Accelerator Program

18.  Each of the five factors 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.

A merit-based screening process

19.  Entry into the program is decided via an application and interview process.

20.  The selection process is highly competitive and open to any applicant. The selection of start-ups for its program is a merit-based screening process.

The company, not an individual, must complete the program

21.  The program is offered to both start-up companies and individuals. That is, there will be occasions where individuals are certified at the completion of the program and occasions where both the company and the individual are certified.

22.  It is accepted that companies undertake and complete the program. It must be noted however that instances where an individual alone (and not a company) is certified upon completion of the program, the requirements of item 4 of the table in subsection 360-45(1) will not have been met.

Time-limited support

23.  Generally, time-limited support will mean a program lasting between three to six months. The program is completed within this timeframe. It is an intensive and structured program and falls within the meaning of time-limited support.

Six month minimum period

24.  Since the program has been running since 2016, it has been provided for more than six months, with completion by a number of cohorts.

25.  The Company meets the requirement of having provided accelerator programs for a minimum period of six months.

Prior completion by a cohort of entrepreneurs

26.  The program has been completed by four cohorts.

27.  The Company meets the requirement that it have at least one cohort of entrepreneurs previously complete one of its accelerator programs.

Conclusion

28.  The program is an accelerator program according to the common 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).

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