Edited version of private advice

Authorisation Number: 1051597649392

Date of advice: 23 October 2019

Ruling

Subject: Early stage investor tax offset

Question

In respect of the shares issued by Company A on Date A, when determining an entitlement to the tax offset under section 360-15 of the Income Tax Assessment Act 1997 (ITAA 1997), would Fund A have been entitled to the offset under subsection 360-15(1) if it was an individual?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

1.           Company B as trustee for the Fund A is a shareholder of Company A and in respect of previously issued shares to Fund A in which Fund A received private rulings ruling that it was eligible for the early stage innovator tax offset in respect of the shares issued on these dates.

2.           On Date A Company A issued additional shares to Fund A. After the shares were issued on Date A, Fund A held less than 30% of the total shares issued in Company A and the Founder of Company A held more than 50% of in Company A.

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

4.           Company A has received private rulings concluding that for the years ended 30 June 2019 that it met the criteria of an Early Stage Innovation Company (ESIC) under subsection 360 40(1) of the ITAA 1997.

5.           Person A is the sole director and secretary of Company C which is the trustee of the Trust A. Trust A is also a shareholder in Company A.

6.           Details of the relationship between Trust A, Trust B and Person A was provided.

7.           Details of the relationship between Trust A, Trust B, and Person A was provided

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

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

Summary

In respect of the shares issued by Company A on Date A, Fund A would have been entitled to the offset under subsection 360-15(1).

Therefore the trustee of Fund A is entitled to the offset which can be applied again the tax liability of the fund or carried forward by the trustee until such time as the fund has a tax liability in a future year of tax.

Detailed reasoning

Background 360-15

Trustees- entitlement to offset

8.      A trustee for a trust is entitled to the offset under subsection 360-15(3) if they would have been entitled to the offset under subsection 360-15(1).

9.      Based on the facts of this case subsection 360-15(3) will apply to the trustee of Fund A. as a result the trustee cannot distribute the offset it receives to the members of the fund. The trustee would have to apply it to the fund's tax liability or carry it forward until such time as the fund has a tax liability.

Individual's entitlement to offset -360-15(1)

10.   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 Fund A's circumstances - 360-15(1)

Company issues shares that are equity interests

11.   The shares issued to Fund A represent an equity interest in Company A.

Subsection 360-40(1) applies to the Company

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

Neither the company nor the individual is an affiliate

13.   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.

14.   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.

15.   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.

16.   The information provided with the ruling application demonstrated that Company A and Fund A are not affiliates 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 by Fund A under an employee share scheme.

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

17.   The facts provided show that Fund A's equity interest at the test time was not more than 30%.

Conclusion 360-15(1)

18.   Had subsection 360-15(1) applied to Fund A it would have been entitled to the offset under subsection 360-15(1) for the shares issued Company A on Date A.