Edited version of private advice

Authorisation Number: 1052024494573

Date of advice: 25 August 2022

Ruling

Subject: ESIC tax offset

Question 1

Is the Trust entitled to a tax offset under section 360-15 of the Income Tax Assessment Act 1997 (ITAA 1997) for the year ended 30 June 20XX?

Answer

Yes

Question 2

Are the members of the Trust entitled to a tax offset in accordance with section 360-25 of the ITAA 1997 for the year ending 30 June 20XX for the shares the Trust acquired in A Co?

Answer

Yes

Question 3

Does section 360-50 of the ITAA 1997 apply to the shares issued to the Trust by A Co?

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 Company is the trustee for the Trust.

The Trust was established by deed of trust.

The sole director and secretary of the trust is an individual.

A Co met the criteria of an Early Stage Innovation Company under subsection 360-40(1) of the ITAA 1997 in the relevant period.

A trust known as the X Fund was established.

The Family Trust acquired units in the X Fund.

The assets of the X Fund were transferred to A Co and, in consideration for which, ordinary shares were issued to all of the unitholders of the X Fund. Each unitholder received the same number of shares in A Co as the units they held in the X Fund.

The X Fund was vested and wound up and shortly after all the assets of the X Fund were transferred to A Co. Upon the vesting of the X Fund and the transfer of all of its assets, the X Fund ceased to exist and the interest of the Trust in the X Fund came to an end.

Immediately after the Trust acquired the shares, the Trust's total ordinary shares in A Co was a very small percentage.

The shares are not issued under an employee share scheme.

None of the other shareholders of A Co were affiliates of the Trust or the individual within the meaning of section 328-130 of the ITAA 1997 and none were connected with the Trust within the meaning of section 328-125 of the ITAA 1997.

The individual did not have any active involvement in the operations or the business of A Co. The Trust's investment in X Fund and subsequently A Co was a passive investment.

Other than the Trust being a shareholder of A Co, there was no commercial relationship between the Trust and A Co.

The Trust holds a sophisticated investor certificate compliant with paragraph 708(8)(c) of the Corporations Act 2001.

Relevant legislative provisions

Subdivision 360-A of the Income Tax Assessment Act 1997

Reasons for decision

Division 360 of the ITAA 1997 outlines the criteria for an investor purchasing new shares in a qualifying Early Stage Innovation Company (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

Subsection 360-15(1) of the ITAA 1997 provides the requirements of the entitlement to the tax offset as the following:

You are entitled to a tax offset for an income year if:

(a)  you are none of the following:

a.    a trust or a partnership;

b.    an ESVCLP; (ii) a widely held company or a 100% subsidiary of a widely held company; and

(b)  at a particular time during the income year, a company issues you with equity interest that are shares in the company; and

(c)   subsection 360-40(1) (about early stage innovation companies) applies to the company immediately after that time; and

(d)  neither you nor the company is an affiliate of each other at that time; and

(e)  the issue of those shares is not an acquisition of ESS interests under an employee share scheme;

(f)    immediately after those shares were issued, the entity does not hold more than 30% of the equity interests in the company, nor an entity connected with the company.

Limited entitlement for certain kinds of investors

Section 360-20 of the ITAA 1997 provides limited entitlement for certain kinds of investors. It provides:

1.    You do not satisfy paragraph 360-15(1)(b) if:

(a)  for each offer resulting in equity interests that are shares in the company being issued to you during the income year, none of subsection 708(8), (10) or (11) of the Corporations Act 2001 removed the need for a disclosure document; and

(b)  a total of more than $50,000 was paid for the issue to you of the shares resulting from all of those offers.

2.    For the purposes of this section, assume that Chapter 6D of the Corporations Act 2001 applies to those offers.

Sophisticated Investors

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.

An entity is a sophisticated investor if 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 a company or trust controlled by a person holding the certificate, or

    iii.        you are offered the qualifying share 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 (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 that you manage).

Application to your circumstances

Under subsection 360-15(1)(a) the investor cannot be a trust, partnership, ESCVLP or a widely held company. Family Trust is a trust. However, under subsection 360-15(2) a member of a trust at the end of an income year is entitled to a tax offset for the income year if the trust would be entitled to a tax offset under section 360-15 if it were treated as an individual and the member is not a widely held company or 100% subsidiary of a widely held company.

The Trust was issued with ordinary shares in A Co that carried the right to receive a small percentage of any distribution of income by A Co. The shares, being ordinary shares in A Co, were equity interests and paragraph 360-15(1)(b) of the ITAA 1997 is satisfied.

Immediately after the shares were issued to the Trust, subsection 360-40(1) of the ITAA 1997 applied to A Co. A Co met the criteria as an Early Stage Innovation Company (ESIC) for the whole of the relevant period.

Subsection 328-130(1) of the ITAA 1997 provides that an individual or company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of that individual or company. As the parties are not related, nor connected other that by a minor shareholding, there is no evidence that the Trust and A Co acted, or would be expected to act, in accordance, or in concert, with each other in relation to their business affairs. Therefore, the Trust satisfies paragraph 360-15 (d) of the ITAA 1997.

The share issue is not issued under an employee share scheme. Therefore, paragraph 360-15(1)(e) is satisfied.

The Trust's shareholding is below the XX% equity interest threshold for distribution of income, capital and voting power. Nor does the Trust hold equity interests in any entity connected with A Co that carry such rights. Therefore, paragraph 360-15(1) (f) is satisfied.

All the conditions provided in subsection 360-15(1) of the ITAA 1997 have been satisfied therefore the tax offset under section 360-15 of the ITAA 1997 for the year ended 30 June 20XX is available.

The Trust holds a sophisticated investor certificate compliant with paragraph 708(8)(c) of the Corporations Act and therefore the restrictions on the amount paid for shares under section 360-20 of the ITAA 1997 will not apply for this share issue.

Conclusion

The Trust is entitled to a tax offset under section 360-15 of the ITAA 1997 for the shares acquired in A Co on XX in the year ended 30 June 20XX.

Question 2

Summary

The members of the Trust are entitled to a tax offset in accordance with section 360-25 of the ITAA 1997 for the year ended 30 June 20XX for the shares it acquired in A Co for an amount equal to XX% of the sum of any money and non-cash benefits received by A Co in return for the issue of the shares to the Trust.

Detailed reasoning

Subsection 360-25(1) of the ITAA 1997 outlines that the amount of tax offset is XX%of the sum of any money and non-cash benefits received or entitled to be received by the company in return for the issue to the shareholder of the shares. Subsection 360-25 states:

1.    If subsection 360-15(1) applies, the amount of your tax offset is 20% of the sum of the following:

(a)  an amount equal to any money received, or entitled to be received, by the company referred to in paragraph 360-15(1)(b) for the issue to you of the shares as described in that paragraph;

(b)  an amount equal to the market value of any non-cash benefit received, or entitled to be received, by the company referred to in paragraph 360-15(1)(b) for the issue to you of the shares as described in that paragraph, as at the time the shares were issued to you.

2.    However, reduce this amount to the extent necessary to ensure that the sum of the following does not exceed $200,000:

(a)  the sum of the tax offsets under this Subdivision for the income year for which you and your affiliates (if any) are entitled;

(b)  the sum of the tax offsets under this Subdivision that you and your affiliates (if any) carry forward to the income year.

Application to your circumstances

The assets of the X Fund were transferred to A Co and, in consideration for which, A Co issued ordinary shares to all of the unitholders of X Fund. Each unitholder received the same number of shares in A Co as the units they held in the X Fund. Accordingly, the Trust was issued a number of ordinary shares in A Co.

The X Fund was vested and wound up shortly after all the assets of X Fund were transferred to A Co. Upon the vesting of the X Fund and the transfer of all of its assets, the X Fund ceased to exist and the interest of the Trust in the Fund (as represented by its units) came to an end.

A Co did not receive any money for the issue of the shares to the unitholders of X Fund, instead, A Co was transferred the assets and business of the X Fund.

As subsection 360-15(1) of the ITAA 1997 applies in respect of the shares issued by A Co to the Trust, the amount of the tax offset available in accordance with paragraph 360-25(1)(b), is XX% of an amount equal to the market value of the non-cash benefits received by A Co (assets and business of the X Fund) for the issue of the shares.

The Trust held a number of units of the total units in the X Fund. In consideration for the Trust transferring its interest in the assets and business of X Fund to A Co, A Co issued the Trust a number of shares.

As such, the Trust's interest in the assets and business X Fund transferred to A Co (the non-cash benefit) equates to the Trust's units in X Fund.

In accordance with section 360-25 of the ITAA 1997, the amount of the tax offset available to the Trust is XX% of the market value of its interest in the non-cash benefits received by A Co (the assets and business of the X Fund) for the issue of the shares.

The amount of the offset will be capped at $XX.

Question 3

Section 360-50 of the ITAA 1997 applies if the issuing of shares to an entity gives rise a tax off set under subdivision 360-A of the ITAA 1997.

The ordinary shares issued by A Co to the Trust give rise to the tax offset in section 360-15 of the ITAA 1997. As such, 360-50 of the ITAA 1997 will apply to the shares issued by A Co to the Trust.

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