What if the company has a ruling on the tests?
The ruling only applies to the facts that the company has provided in their ruling request.
Your eligibility for the early stage investor tax incentives will depend on your circumstances as well as whether the company meets the ESIC requirements at the time immediately after it issued you with new shares. Consequently, you should make enquiries to confirm that there has been no change in the company’s activities subsequent to it receiving a ruling that could lead to a different outcome under the tests. You should also consider whether you are eligible as an investor.
The ruling provided to the company does not amount to financial advice or imply that we endorse or guarantee investment in the company. Investors should form their own views about whether to invest in a company and should seek independent financial advice if needed.
How do I claim the early stage investor tax offset?
You can claim the early stage investor tax offset in your income tax return. If you do not use all of your tax offset in that year, you can carry it forward for use in future income years.
As with other non-refundable carry-forward tax offsets, you should apply the early stage investor tax offset only after applying any tax offsets that cannot be carried forward. This ensures that you do not lose the benefit of non-carried forward tax offsets. The order in which you should apply tax offsets is provided in subsection 63-10(1) of the Income Tax Assessment Act 1997External Link.
How does the tax offset affect PAYG income tax instalments?
The early stage investor tax offset that you receive in an income year is not taken into account in determining your ATO-calculated PAYG instalment amounts for the following year.
If your PAYG instalments do not reflect your end-of-year tax situation because you expect to claim the early investor tax offset, you may wish to vary your PAYG instalments.
What if I have a substituted accounting period and will be claiming the tax offset in 2016?
If you have a substituted accounting period, you may need to claim the tax offset on the 2016 tax return if either:
- you are a late August, September, October, November or December balancer and the date you purchased the qualifying shares (which must be on or after 1 July 2016) is within your 2015–16 income year
- you have an early balancing substituted accounting period, and the 2017 income tax return is not available when you are lodging your return.
As the 2016 income tax return does not have a specific label for the early stage investor tax offset, you can claim the tax offset at the non-refundable carry forward tax offset item on that tax return. Trustees that are claiming the tax offset will need to attach additional information stating their entitlement to the early stage investor tax offset when lodging their Trust tax return.
If this applies to you, your instalment amounts calculated by the ATO may be incorrect. You can contact the ATO to explain these circumstances to have your instalment amount corrected.
Can a member of a trust or partnership be eligible for the early stage investor tax offset?
A member of a trust (a beneficiary, unit-holder or object) or partnership (a partner) may be entitled to the early stage investor tax offset if:
- they are a member of the trust or partnership at the end of the income year, and
- the trust or partnership would be entitled to the tax offset for that income year if it were an individual investor.
In some cases, the members of a trust or partnership may include another trust or partnership. In this situation, the tax offset passes to the ultimate member that is not a trust or partnership.
Determining a member’s share of the early stage investor tax offset
The amount of early stage investor tax offset to which a member of a trust or partnership is entitled is calculated as the amount of the offset that would be available to the trust or partnership if it were an individual investor, multiplied by the member's percentage share of the tax offset.
The member's percentage share of the tax offset is determined by the partnership or trustee of a trust. If, under the terms of a trust or partnership, a member would be entitled to a fixed percentage of any capital gain on the investments of the entity, then the member's share of the tax offset determined by the trustee or partnership must equal this entitlement. Otherwise, there are no requirements as to how the tax offset is allocated to members.
The partnership or trustee of the trust must notify the member in writing of their share of the tax offset within three months of the end of the income year.
If the partnership or trustee does not make a determination, or if part of the early stage investor tax offset is not allocated to any member, then no member will be entitled to that amount of the tax offset.
The total amount of early stage investor tax offset from all members of the trust or partnership cannot exceed 100% of the amount that the trust or partnership would be entitled to if it was an individual investor.
Example 1 – Entitlement to fixed proportion of trust capital gains
Sladja and Roger are unit-holders in Manakau unit trust. The trustee is required to distribute capital gains made by the trust to Sladja and Roger in proportion to the number of units that they each hold at the end of the year. At the end of the 2016–17 income year, Sladja owns 80% of the units and Roger owns 20%.
If the Manakau unit trust were an individual investor, it would be entitled to claim an early stage investor tax offset of $200,000 in the 2016–17 income year. Therefore, the trustee must determine that Sladja's share of the tax offset is $160,000 and Roger's share is $40,000.
The trustee must give a written notice to Sladja and Roger advising each of them of their share of the tax offset within three months of the end of the 2016–17 income year (or such further time as the Commissioner may allow).
End of example
Example 2 – Discretionary entitlements to capital gains
Matt and Carolyn are beneficiaries of the Koru trust. If the Koru trust were an individual investor, it would be entitled to claim an early stage investor tax offset of $10,000 in the 2016–17 income year.
Under the terms of the Koru trust, the beneficiaries have no entitlement to receive distributions of any capital gains until such time as the trustee exercises its power of appointment in their favour.
The trustee determines that Carolyn and Matt will each have a 50% share of the notional early stage investor tax offset for the 2016-17 income year.
The trustee must give a written notice to Matt and Carolyn advising each of them of their share of the tax offset within three months of the end of the 2016–17 income year.
End of example
What if the trustee is liable for tax?
A trustee of a trust is entitled to an early stage investor tax offset if both:
- the trust would be entitled to the tax offset if it were an individual
- the trustee is liable to pay tax on all or part of the net income of trust (under sections 98, 99 or 99A of the Income Tax Assessment Act 1936).
The amount of tax offset available to the trustee is the amount that would be available to the trust if it were an individual investor, less any amount of the tax offset to which the beneficiaries are entitled and relate to the same ESIC shares that give rise to the trustee's offset entitlement.
How does CGT apply to qualifying shares?
If you acquire shares in a qualifying ESIC, you are taken to hold the shares on capital account, rather than revenue account. This means that, for example, when you sell the shares, this will give rise to a capital gain or capital loss, rather than other income tax consequences.
The maximum cap of $200,000 that applies for the early stage investor tax offset does not limit the shares that qualify for the modified CGT treatment.
However, if you exceed the $50,000 investment limit for investors who do not meet the sophisticated investor test, you will not receive either the early stage investor tax offset or the modified CGT treatment for any shares acquired in that income year.
The tax incentives have various requirements for investors and the company that are tested at specified times - eg, at the time of the share issue (affiliate test) or immediately after (investors not to have a greater than 30% equity holding and the company must qualify as an ESIC). This means that, if you or the company no longer meet the eligibility requirements after the relevant times, this does not affect your entitlement to either the tax offset or the modified CGT treatment for those shares.
How the CGT rules apply to your qualifying shares will depend on both how long you hold the shares before a CGT event happens to them (such as the sale of the shares), and whether you make a capital gain or capital loss from the CGT event.
Qualifying shares held for less than 12 months
If you continuously hold qualifying shares for less than 12 months before a CGT event happens to the shares, any capital gain you make from the event is not disregarded.
However, you must disregard any capital loss you make from a CGT event that happens to the shares during this period.
Qualifying shares held for 12 months or more but less than ten years
You can disregard a capital gain that you make from a CGT event happening to qualifying shares if you have held them continuously for 12 months or more but less than ten years.
However, you must disregard a capital loss that you make from a CGT event happening to the shares during this period.
Qualifying shares held for ten years or more
If you have continuously held a qualifying share for ten years, the first element of the cost base and reduced cost base for the share will become its market value on the tenth anniversary of the share being issued to you. This means that you will recognise any capital gains or losses that happen from this point in time.
We provide guidance and advice products that deal with market valuation for tax purposes, and accepted principles of valuation which are equally applicable to shares that are not listed on a stock exchange.
How does the modified CGT treatment apply to a roll-over?
Generally, special rules apply to preserve the modified CGT treatment for qualifying shares when you apply a CGT roll-over. However, the modified CGT treatment is terminated when you apply certain roll-overs.
If a same asset roll-over applied to a qualifying share, the share is taken to have been acquired by the new entity at the same time as when it was originally issued by the ESIC to the original investor. Therefore the modified CGT treatment is preserved in the hands of the new entity.
If a replacement asset roll-over (other than a scrip for scrip or newly incorporated company roll-over) applied to a qualifying share, the replacement asset is taken to have been acquired by the investor at the same time the share in the qualifying ESIC was originally issued. Therefore the modified CGT treatment is preserved for the replacement asset, as though it was the original asset you purchased.
However, if a scrip for scrip or newly incorporated company roll-over applies to a qualifying share after the first anniversary, but before the tenth anniversary, of its issue, the share is taken to have a first element of the cost base and reduced cost base equal to its market value immediately before it is exchanged under the roll-over. This rule means that the modified CGT treatment is terminated, but that any capital gains or losses on the share before the roll-over is applied are not recognised when the replacement asset is sold.
Schemes to qualify for the tax incentives
The general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 may apply to schemes to access the early stage investor tax incentives, including both the tax offset and the modified CGT treatment.
These rules apply to prevent taxpayers from obtaining tax benefits by entering into contrived or artificial arrangements to access the tax incentives. Where the conditions in Part IVA are satisfied, the Commissioner can cancel the relevant tax benefits.
From 1 July 2016, investors that purchase new shares in a qualifying early stage innovation company (ESIC) may be eligible for tax incentives.