Edited version of your written advice

Authorisation Number: 1051361986624

Date of advice: 17 April 2018

Ruling

Subject: Investor Eligibility to the tax incentives for investing in a qualifying Early Stage Innovation Company

Question

Is the investor, a trust, entitled to the tax offset and modified capital gains treatment for shares in a qualifying Early Stage Innovation Company under Subdivision 360-A of the Income Tax Assessment Act 1997 (ITAA 1997) for the year ending 30 June 2018?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The trust is a discretionary trust.

The trust is considering investing in a qualifying ESIC.

The trust is seeking to invest as a Sophisticated Investor.

The ESIC will issue new shares in the form of ordinary equity interests.

Neither the trust nor it’s beneficiaries are affiliates of the ESIC.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360-A

Reasons for decision

Tax incentives for early stage investors in innovation companies

1. Division 360 outlines the criteria for an investor purchasing new shares in a qualifying ESIC to be eligible to the following tax incentives:

- non-refundable carry forward tax offset equal to 20% of the amount paid for their qualifying investments, capped at a maximum tax offset amount of $200,000 for the investor and their affiliates combined in each income year

- modified capital gains tax (CGT) treatment, under which capital gains on qualifying shares that are continuously held for at least 12 months and less than ten years may be disregarded. Capital losses on shares held less than ten years must be disregarded

Entitlement to the tax offset – Section 360-15

2. Section 360-15 provides that the tax incentives are available to all types of investors, regardless of their preferred method of investment (whether an investment is made directly as a corporation or individual or indirectly through a trust or partnership) other than ‘widely held companies’ (as defined in section 995-1) and 100 per cent subsidiaries of these companies provided certain conditions are met and restrictions do not apply.

Limited entitlement for certain kinds of investors – Section360-20

3. Entities that acquire newly issued shares in an Australian ESIC may receive a non- refundable carry-forward tax offset of 20 per cent of the value of their investment subject to a maximum offset cap amount of $200,000 provided they satisfy certain conditions.

Sophisticated Investors- sections 708(8) or (10) or (11) of the Corporations Act 2001

4. There are no restrictions on the amount an entity may invest if the entity meets the requirements of the Sophisticated Investor Test as described in section 708 of the Corporations Act 2001 (Corporations Act) in relation to a relevant offer of shares at any time in the income year. The sophisticated investor test is used for investment opportunities that have reduced disclosure requirements, on the basis that investors that meet this criteria are more likely to be able to evaluate offers of securities and other financial products without needing the protection of a disclosure document.

5. An entity maybe a sophisticated investor they meet one of the following requirements:

I. you have paid at least $500,000 for the qualifying shares (either as a single offer or including any amounts you previously have paid for shares of the same class that you hold in the same company), or

II. hold a certificate issued by a qualified accountant that confirms you meet certain asset and income requirements, or

III. you are offered the qualifying shares through a financial services licensee who is satisfied that you have previous investment experience that allows you to assess the offer and you sign a written acknowledgement that the licensee hasn't given you a disclosure document in relation to the offer, or

IV. you meet the requirements of being a 'professional investor' under the Corporations Act 2001 (such as a financial services licensee), or

V. you have or control gross assets of at least $10 million (including any assets held by an associate or a that you manage)

Other Investors

6. For other (non-sophisticated) investors a total annual investment limit of $50,000 applies. These investors will not be entitled to a tax offset if their investment exceeds this maximum threshold.

The investor and the ESIC must not be affiliates of each other – Section 328-130

7. To qualify for the tax offset, the ESIC must not be an affiliate of the investor entity nor can the investor entity be an affiliate of the ESIC at the time the relevant shares are issued. That is, the ESIC must not act, or reasonably be expected to act, in accordance with the investor’s directions or wishes, or in concert with the investor, in relation to the affairs of the business of the ESIC and vice versa.

30 per cent equity interest restriction – Section 328-125

8. To qualify for the tax offset, the investor entity must not hold more than 30 per cent of the equity interests of an ESIC, including any entities ‘connected with’ the ESIC, tested immediately after the time relevant equity interests are issued.

Members of trusts or partnerships – Section 360-30

9. A member of a trust or partnership, being a beneficiary or unit holder of a or a partner in a partnership (section 960-130) at the end of an income year is entitled to a carry-forward tax offset for that income year, if the trust or partnership were an individual and would be entitled to a tax offset.

10. The amount of the offset is determined by the:

- notional tax offset that is the member’s share of the offset as determined by the trustee or partnership; and

- notional tax offset amount that is the amount of the offset that would be available to the trust or partnership were it an individual.

Modified CGT Treatment – section 360-50

11. An investor that acquires shares in a qualifying ESIC will be taken to hold these shares on capital account and the disposal of these shares would give rise to a capital gain or a capital loss as per paragraph 360-50(2).

12. The specific CGT consequence arising for these shares depends on:

- when the investor entity deals with the shares (and the relevant CGT event happens); and

- whether the investor entity realises a capital gain or a capital loss from that event

Shares held for more than 12 months and less than ten years

13. An investor that has continuously held a qualifying share for between 12 months and less than ten years may disregard a capital gain arising from the share however it must disregard any capital loss as per subsections 360-50(3) and (4)

Shares held for 10 years or more

14. An investor that has continuously held a qualifying share for at least ten years will receive a market value, as determined on the ten year anniversary date, as the first element of the cost base and reduced cost base of the share. This ensures that any incremental gains (or losses) in value after 10 years will be taxable as per subsection 360-50(5).

Application to your circumstances - year ending 30 June 2018

Entitlement to the tax offset – subsections 360-15(1) and (2), 960-130(1)(3)

1. As the tax incentives are available to all types of investors other than ‘widely held companies’ (as defined in section 995-1) and 100 per cent subsidiaries, the Trust, satisfies paragraphs 360-15(1) and (2) along with the meaning of member as defined in paragraph 960-130(1)(3).

The investor and the ESIC must not be affiliates of each other – Sections 328-130(1), and 328-130(2), 360-15(1) and (2)

2. The ESIC has met the criteria of a qualifying ESIC.

3. The Trust and the ESIC are not affiliated.

4. There is no indication that either party would act, or reasonably be expected to act, in accordance with the other’s directions or wishes, nor in concert in relation to the affairs of the business of the ESIC and vice versa. Therefore paragraphs 328-130(1), 328-130(2) and 360-15(1) and(2) are satisfied.

Employee Share Scheme - 360-15(1)(e)

5. The share issue is not issued under an employee share scheme and therefore the paragraph 360-15(1)(e) is satisfied.

30 per cent equity interest restriction – Section 360-15(1)(f) and (2) and 328-125

6. The Trust has stated that they will not hold greater than 30% of the ordinary equity in the ESIC and there is no evidence to indicate they hold or will hold more than 30% of the equity interests in this ESIC (or with another entity if the ESIC controls the other entity (or vice versa) or both are controlled by the same third entity). Therefore the Trust will satisfy paragraph 360-15(1)(f) and (2)

Limited entitlement for certain kinds of investors – Section 360-20(1)(a) and (b)

7. Restrictions apply to the amount and entitlement of the offset as provided in paragraphs 360(20)(1) and (b) which relate to a type of investor.

8. Under the Corporations Act 2001, 'sophisticated investors' who meet certain requirements don't have to be provided with a disclosure document, when being offered shares in a company. Our document entitled Tax incentives for early stage investors, available on our website ato.gov.au using quick code QC 48899 includes examples of when someone may be a sophisticated investor.

9. Following the examples on our website indicates the Trust will satisfy the requirements of paragraph 360-20(1)(b) and the restrictions will not apply.

Entitlement to modified CGT Treatment – section 360-50(1) and (2)

10. Investors that are entitled to the tax offset will also be entitled to modified CGT treatment under paragraph 360-50(1) and the shares are treated as being held on capital account as per paragraph 360-50(2). As the Trust is entitled to the tax offset, it satisfies paragraph 360-50(1) and (2)

11. The specific CGT consequence arising for these shares will depend on when the investor entity deals with the shares (and the relevant CGT event happens); and whether the investor entity realises a capital gain or a capital loss from that event as described in paragraphs 360-50(3)(a) and (b),360-50(4)(a) and(b) and 360-50(5).

Conclusion

The investor trust has demonstrated it satisfies the requirements under Subdivision 360-A of the ITAA 1997 and is entitled to the tax offset and modified capital gains treatment for shares issued by a qualifying Early Stage Innovation Company for the year ending 30 June 2018.

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