Edited version of private advice

Authorisation Number: 1051564259888

Date of advice: 09 August 2019

Ruling

Subject: Tax offsets

Question 1:

Is Taxpayer A entitled to a tax offset for the 20XX income year for their contribution to an Early Stage Venture Capital Limited Partnership ('ESVCLP') pursuant to subsection 61-760(1) of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Answer:

Yes

Question 2:

For the purposes of determining Taxpayer A's tax offset for the 20XX income year, is the investment made by the ESVCLP in an Eligible Venture Capital Investment ('EVCI') through an agent on xx XX 20XX included in the sum of eligible venture capital investments pursuant to section 61-765 of the ITAA 1997?

Answer:

Yes

This ruling applies for the following periods

XX 20YY to xx XX 20XX

RELEVANT FACTS AND CIRCUMSTANCES

1.      Taxpayer A is an individual who made a contribution of $xxx to the ESVCLP, Fund B, as a limited partner on xx XX 20XX.

2.      The ESVCLP is under no obligation to repay the capital contribution back to Taxpayer A.

3.      The ESVCLP's investment committee and the ESVCLP's general partner approved an investment to be made in an EVCI on x XX 20XX in accordance with the investment plan.

4.      The investment in the EVCI was subsequently approved on yy YY 20XX by another management entity, Entity C, which has responsibility for ensuring that investments made by the ESVCLP meet the criteria set out in its investment plan.

5.      The investment in the EVCI required a transfer of funds in US Dollars.

6.      On xx XX 20XX, the ESVCLP transferred funds to an agent who had access to a better foreign exchange rate than the ESVCLP, for investment in the EVCI, on behalf of the ESVCLP.

7.      The agent transferred the funds in US Dollars to the EVCI on x XX 20XX.

8.      The EVCI issued the subscription documents dated yy YY 20XX.

Information provided

9.      You have provided a number of documents containing detailed information in relation to the private binding ruling, including:

a.      Private Binding Ruling ('PBR') Application, dated xx XX 20ZZ

b.      Two questions to be answered in the PBR

c.      Narrative pertaining to detailed reasoning regarding the two questions

d.      Documentation provided in relation to further questions asked by the ATO

10.   We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 61-760(1)

Income Tax Assessment Act 1997 Section 61-765

REASONS FOR DECISION

All legislative references are to the Income Tax Assessment Act 1997 ('ITAA 1997') unless otherwise stated.

QUESTION 1:

SUMMARY

Taxpayer A is entitled to a tax offset for the 20XX income year for their contribution to the ESVCLP pursuant to subsection 61-760(1) of the ITAA 1997.

DETAILED REASONING

Entitlement to the ESVCLP tax offset

11.   Subsection 61-760(1) of the ITAA 1997 sets out who is entitled to the ESVCLP tax offset as follows:

(1)    A limited partner of an ESVCLP is entitled to a tax offset for an income year if:

(a)       the partner contributes to the ESVCLP during the income year; and

(b)       the partner is not a trust or partnership.

APPLICATION TO YOUR CIRCUMSTANCES

Question 1:

12.   Taxpayer A made a contribution of $XXX to the ESVCLP, Fund B, as an individual limited partner on xx XX 20XX.

13.   Subsection 61-760(1) of the ITAA 1997 sets out that an entitlement to the ESVCLP tax offset for an income year is provided to a limited partner of an ESVCLP if:

·           the partner contributes to the ESVCLP during the income year; and

·           the partner is not a trust or partnership.

14.   Taxpayer A is:

·           a limited partner of the ESVCLP; and

·           they contributed to the ESVCLP during the 20XX income year; and

·           They are not a trust or partnership.

15.   As Taxpayer A satisfies all the criteria above, they are entitled to a tax offset for the 20XX income year, pursuant to subsection 61-760(1) of the ITAA 1997.

QUESTION 2:

SUMMARY

The investment made by the ESVCLP in an EVCI through an agent on xx XX 20XX is included in the sum of eligible venture capital investments pursuant to section 61-765 of the ITAA 1997.

DETAILED REASONING

Amount of the ESVCLP tax offset

16.   Section 61-765 of the ITAA 1997 sets out the amount of the ESVCLP tax offset - general case as follows:

(1)    If subsection 61-760(1) applies, the amount of the tax offset for the income year is 10% of the lessor of:

(a)     The sum of the amounts the partner contributes to the ESVCLP during the income year, reduced by any amounts excluded under subsection (2); and

(b)    The amount (the investment related amount) worked out under subsection (3).

(2)    The following amounts are excluded for the purposes of paragraph (1)(a) in relation to the income year:

(a)     any parts of a contribution the partner made to the ESVCLP that the ESVCLP is, or will become, obliged to repay to the partner, whether or not:

(i)     the obligation arises during the income year; or

(ii)     the obligation arises only when the partner requests repayment;

(b)    any parts of a contribution the partner made to the ESVCLP that, during the income year, are repaid to the partner within 12 months after the contribution was made;

(c)     any parts of a contribution the partner made to the ESVCLP to the extent that they comprise a commitment to provide money or property in the future.

(3)    Work out the investment related amount as follows:

Partner's share x sum of eligible venture capital investments

where:

'partner's share' is the partner's share of the capital of the ESVCLP at the end of the income year, expressed as a percentage of the entire capital of the ESVCLP.

'sum of eligible venture capital investments' is the sum of:

(a)    all the amounts of the eligible venture capital investments made by the ESVCLP during the period starting at the start of the income year and ending 2 months after the end of the income year; and

(b)    all the incidental costs, incurred during that period, of making those investments; and

(c)    all the administrative expenses, incurred during that period, associated with those investments.

(4)    For the purposes of paragraph (a) of the definition of sum of eligible venture capital investments in subsection (3), disregard the amounts of any eligible venture capital investments that were taken into account in working out the amount of a tax offset under this Subdivision for a preceding income year.

APPLICATION TO YOUR CIRCUMSTANCES

Question 2:

17.   On xx XX 20XX, the ESVCLP transferred the relevant funds to its agent to invest in the EVCI on behalf of the ESVCLP.

18.   Section 61-765 of the ITAA 1997 sets out the relevant methodology for determining the amount of the applicable tax offset where the contributing partner is not a trust, trustee or partnership.

19.   Section 61-765 provides that the amount of the Taxpayer's tax offset for the 20XX income year is 10% of the lesser of:

a) The sum of the amounts the Taxpayer contributed to the ESVCLP during the 20XX income year reduced by any amounts excluded under subsection (2); and

b) The amount (the investment related amount) worked out under subsection (3).

20. The investment related amount as worked out under subsection 61-765(3) is effectively the Taxpayer's share of the sum of eligible venture capital investments 'made' by the ESVCLP during the period starting at the start of the income year and ending 2 months after the end of the income year (i.e. from y YY 20YY to xx XX 20XX).

21. The word 'made' is not defined in the relevant legislation. Based on the ordinary definition of the word 'made', an investment that has been 'carried out' by the ESVCLP should constitute an investment made by the ESVCLP. Following the required approvals by the ESVCLP investment committee, ESVCLP general partner and Entity C, and the transfer of the funds to the agent by xx XX 20XX, there was nothing further that the ESVCLP could do to 'carry out' the relevant investment in the EVCI. On the approval and the transferring of funds to the agent on xx XX 20XX to invest in the EVCI, the ESVCLP had carried out the relevant investment. Accordingly, it follows that upon making the relevant transfer to its agent, the ESVCLP made the investment in the EVCI within 2 months after the end of the 20XX income year for the purposes of section 61-765 of the ITAA 1997.

22. As such, on the transfer of funds to its agent on xx XX 20XX, the ESVCLP had become definitively committed to the investment.

23. Further, it may also be inferred from paragraph 2.26 of the Explanatory Memorandum ('EM') to the Tax Laws Amendment (Tax Incentives for Innovation) Bill 2016 that the legislature had intended for the term 'made' to capture amounts spent by the ESVCLP in making EVCIs during the relevant period starting at the start of the 20XX income year and ending 2 months after the end of the 20XX income year (i.e. from y YY 20YY to xx XX 20XX).

24. The ESVCLP transferred the relevant funds to the agent on xx XX 20XX. On making this payment, the ESVCLP had spent the funds by xx XX 20XX and the funds were spent in making an EVCI.

25. The investment made by the ESVCLP in the EVCI should therefore be included in the sum of eligible venture capital investments under section 61-765 of the ITAA 1997 for the purposes of determining the Taxpayer's tax offset for the 20XX income year.

CONCLUSION

26. Taxpayer A is entitled to a tax offset for the 20XX income year for their contribution to the ESVCLP pursuant to subsection 61-760(1) of the ITAA 1997.

27. The investment made by the ESVCLP in an EVCI through an agent on xx XX 20XX is included in the sum of eligible venture capital investments pursuant to section 61-765 of the ITAA 1997.