1051348517558 | Legal database

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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1051348517558

Date of advice: 12 March 2018

Ruling

Subject: Early Stage Innovation Company entitlement to offset

Question 1

In respect of the shares issued by Company A on Date A, is Person A entitled to the tax offset under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

In respect of the shares issued by Company A on Date B, is Person A entitled to the tax offset under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 3

In respect of the shares issued by Company A on Date C, is Person A entitled to the tax offset under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 4

In respect of the shares issued by Company A on Date D, is Person A entitled to the tax offset under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on:

1 July 2016

Relevant facts and circumstances

1. Person A is a shareholder in Company A and had shares issued on Dates A to D.

2. Company A has received private rulings concluding that for the years ended 30 June 2017 and 2018 it meets the criteria of an Early Stage Innovation Company (ESIC) under subsection 360 40(1) of the ITAA 1997.

3. Person A is the sole director and secretary of Company B which is the trustee of the Trust A.

4. Trust A is also a shareholder in Company A and in respect of its shares it has received two private rulings (authorisation numbers 1051244017211 and 1051319235370) ruling that they would be eligible for the offset under section 360-15 of the ITAA1997.

5. In the capacity as sole director and secretary of Company B Person A has authorised the ATO to use the information previously provided by Company B in respect of CET’s relationship with Company A in making this ruling in respect of his own eligibility for the offset under section 360-15 of the ITAA1997.

6. The change in the relationship between Companies A and B was detailed in the application.

7. On Date D, the date of Person A’s last purchase of Company A shares, Company A’s founder held X% of the equity interest in Company A which is the lowest percentage of ownership ever held. On the same date Person A held Y% of the equity interest in Company A.

8. ASIC records show that all shares issued to Person A are ordinary shares in Company A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 Subdivision 360-A

Income Tax Assessment Act 1997 section 360-15

Reasons for decision

Questions 1-4

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

Summary

Person A is entitled to the offset under subsection 360-15(1) for the shares issued on Dates A to D.

Detailed reasoning

Background 360-15(1)

1. An individual is entitled to the offset if:

− at a particular time during the income year, a company issues the individual with equity interests that are shares in the company;

− the company was an ESIC immediately after the shares were issued;

− neither the company or the individual is an affiliate of each other when the shares were issued;

− the issue of those shares is not acquired under an employee share scheme; and

− immediately after the shares were issued, the individual didn’t hold more than 30% of the equity interests in the company or in an entity connected with the company.

Application to Person A’s circumstances - 360-15(1)

Company issues shares that are equity interests

2. The shares issued to Person A represent an equity interest in Company A.

Subsection 360-40(1) applies to the Company

3. Company A was an ESIC immediately after the shares were issued.

Neither the company nor the individual is an affiliate

4. The meaning of affiliate is set out in section 328-130. An individual or company is an affiliate of an entity where that individual or company acts, or could reasonably be expected to act:

− in accordance with the entity’s directions or wishes in relation to the affairs of that individual or company’s business; or

− in concert with the entity in relation to the affairs of the individual or company’s business.

5. Subsection 328-130(2) states that an individual or company is not your affiliate merely because of the nature of the business relationship you and the individual or company share.

6. The following factors may have a bearing on whether an individual or company is an affiliate of an entity to the extent that they show that two or more entities acting in concert:

− family or close personal relationships;

− financial relationships or dependencies;

− relationships created through links such as common directors, partners, or shareholders;

− the degree to which the entities consult with each other on business matters; or

− whether one of the entities is under a formal or informal obligation to purchase goods or services or conduct aspects of their business with the other entity.

7. In rulings issued to Trust A we have already determined examined Person A’s relationship with Company A as sole director and secretary of Company B being the trustee of Trust A.

8. That examination concluded that in his capacity as sole director and secretary of Company B that Person A was not an affiliate of Company A.

9. The change in the relationship between Companies A and B was provides. However this change would not impact the conclusion reached in the rulings issued to Trust A in whether it was an affiliate of Company A.

10. The conclusions reached in respect Person A’s capacity as sole director and secretary of Company A equally apply in respect of his own shareholding.

11. Therefore neither Company A nor Person A is an affiliate of each other.

Acquired under an employee share scheme

16. Person A is not an employee of Company A. Therefore the shares cannot have been acquired under an employee share scheme.

The individual didn’t hold more than 30% of the equity interests

17. On Date D the Founder of Company A held more than 70% of the equity interest. The percentage held was the lowest percentage the Founder has ever held up to that point. Therefore Person A’s interest could not have been more than 30% on any of the dates shares were issued to him.

Conclusion 360-15(1)

18. Person A is entitled to the offset under subsection 360-15(1) for the Company A shares issued on Dates A to D.

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