Edited version of private advice

Authorisation Number: 1052012689133

Date of advice: 8 September 2022

Ruling

Subject: Early stage investors in innovation companies

Question 1

Are you entitled to a tax offset for shares purchased in the Company, pursuant to subsection 360-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

If the answer to Question 1 is yes, is the amount of the tax offset for those purchased shares equal to $XX, pursuant to section 360-30 of the ITAA 1997?

Answer

Yes.

Question 3

Will the Commissioner grant discretion to extend the period in which the trustee must give the notice under subsection 360-30(4) of the ITAA 1997?

Answer

Yes.

Question 4

If the shares are owned for at least 12 months, are you entitled to a modified capital gains tax treatment in section 360-50 of the ITAA 1997?

Answer

Yes.

This private ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are the trustee of the Trust.

You make decisions for the Trust and are not influenced by any other parties.

The Trust is a discretionary investment trust.

The Trust has primary and general beneficiaries.

On XX/XX/XXXX, you received and accepted an offer to purchase shares in the Company.

The shares are not issued under an employee share scheme.

You and the Trust have no influence over the business affairs of the Company.

You and the Trust have not made investments in any other ESICs in the 20XX financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 360A

Income Tax Assessment Act 1997 section 360-15

Income Tax Assessment Act 1997 section 360-20

Income Tax Assessment Act 1997 section 360-25

Income Tax Assessment Act 1997 section 360-30

Income Tax Assessment Act 1997 section 360-50

Income Tax Assessment Act 1997 section 328-130

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

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

Question 1

Are you entitled to a tax offset for shares purchased in the Company pursuant to subsection 360-15(2)?

Summary

You are entitled to a tax offset for shares purchased in the Company pursuant to subsection 360-15(2).

Detailed reasoning

1.             Subdivision 360A outlines the entitlement to a tax offset for entities if they are, or a trust or partnership of which they are a member are, issued with certain kinds of equity interests in a small Australian company with high-growth potential that is engaging in innovative activities. A modified capital gains tax (CGT) treatment may also apply to those equity interests.

Entitlement to the tax offset - General case - Subsection 360-15(1)

2.             Subsection 360-15(1) provides that the tax incentives are available for an income year to all types of investors other than a trust or a partnership, 'early stage venture capital limited partnership' (ESVCLP, as defined in subsection 118-407(4)), or 'widely held companies' (as defined in subsection 995-1(1)) and 100% subsidiaries of these companies provided certain conditions are met as set out in paragraphs 360-15(1)(b) to (f) below:

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

(c)           subsection 360-40(1) (about ESICs) 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 the *ESS interests under an *employee share scheme; and

(f)            immediately after the issues of those shares, you do not hold equity interests in the company, or in an entity *connected with the company, that carry the right to:

(i)            receive more than 30% of any distribution of income by the company or the entity; or

(ii)           receive more than 30% of any distribution of capital by the company or the entity; or

(iii)          exercise, or control the exercise of, more than 30% of the total voting power in the company or the entity.

Entitlement to the tax offset - Members of trusts or partnerships - Subsection 360-15(2)

3.             A *member of a trust or partnership (other than a partnership that is an *ESVCLP) at the end of an income year is entitled to a *tax offset for the income year if:

(a)          the trust or partnership were treated as an individual under section 360-15, and

(b)          the member is not a *widely held company or a *100% subsidiary of a widely held company.

4.             Subsection 960-130(1) defines a member of a trust (except a *public trading trust) to be a beneficiary, unit holder or object of the trust.

Limited entitlement for certain kinds of investors - Section 360-20

5.             Section 360-20 states:

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 the subsections 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 section 360-20, assume that Chapter 6D of the Corporations Act 2001 applies to those offers.

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

6.             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.

7.             The Explanatory Memorandum to the Tax Laws Amendment (Small Business) Bill 2007 (EM) at paragraph 2.36 lists the following factors that have a bearing of whether an individual or company is an affiliate of an entity:

(a)          family or close personal relationships

(b)          financial relationships or dependencies

(c)           relationships created through links such as common directors, partners, or shareholders

(d)          the degree to which the entities consult with each other on business matters, or

(e)          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.

8.             None of the factors are determinative in their own right.[1]

9.             An affiliate must be a company or an individual; trusts, partnerships and superannuation funds are not capable of being affiliates. However, a trust, partnership or superannuation fund may have an affiliate that is a company or individual.[2]

Application of the law to your facts

Entitlement to the tax offset - Paragraphs 360-15(1)(b) to (f) and section 328-130

Paragraph 360-15(1)(b)

10.          As the Company issued shares to the Trust, the condition on paragraph 360-15(1)(b) is satisfied.

Paragraph 360-15(1)(c)

11.          As the Company is an ESIC, the condition in paragraph 360-15(1)(c) is satisfied.

Paragraph 360-15(1)(d) and section 328-130

12.          As the investment was made via the Trust, the trust cannot be an affiliate to the Company, however the Company can be an affiliate of the Trust.

13.          In examining the factors outlined in the EM, there is no evidence to suggest that the Company would act, or reasonably be expected to act, in accordance with the Trust's directions or wishes, or in concert with the trust or you, in relation to the affairs of the business of the ESIC and the investor. Therefore, the Commissioner is satisfied that the Company is not an affiliate of the Trust under section 328-130 or paragraph 360-15(1)(d).

Paragraph 360-15(1)(e)

14.          The shares issued by the Company to the Trust were not issued under an employee share scheme.

Paragraph 360-15(1)(f)

15.          On XX/XX/XXXX, you received and accepted an offer to purchase shares in the Company.

16.          On XX/XX/XXXX, the Company resolved to issue and allot the shares to the Trust.

17.          Information confirms that the Trust and you did not (as an individual) hold more that 30% equity interests in the Company or its connected entities immediately after the shares were issued.

Conclusion of paragraphs 360-15(1)(b) to (f)

18.          All the conditions related to paragraphs 360-15(1)(b) to (f) have been satisfied when considering if the Trust would be entitled to a tax offset under section 360-15 for the 20XX income year if it were an individual.

Entitlement to the tax offset - Members of trusts or partnerships - Subsection 360-15(2)

19.          You, as an individual, are the primary beneficiary and therefore, they are a member of a trust within the meaning of subsection 960-130(1).

20.          Per paragraph 360-15(2)(a), the Trust would be entitled to a tax offset under section 360-15 for the 20XX income year if it were an individual.

21.          Per paragraph 360-15(2)(b) and as defined in subsection 960-130(1), you as a member of the Trust are not a widely held company or a 100% subsidiary of a widely held company.

22.          Therefore, per subsection 360-15(2), you are a member of a trust that would be entitled to a tax offset under section 360-15 if it were an individual, which makes you, as an individual, eligible for a tax offset for the 20XX income year.

Limited entitlement for certain kinds of investors - Section 360-20

23.          As the Trust paid $50,000 for shares in the Company, section 360-20 does not apply, and paragraph 360-15(1)(b) remains satisfied.

Conclusion

24.          You are a member of a trust that would be entitled to a tax offset at the end of the 20XX income year if that trust were an individual. Therefore, you as an individual, are entitled to a tax offset for shares purchased in the Company pursuant to subsection 360-15(2).

Question 2

If the answer to Question 1 is yes, is the amount of the tax offset for those purchased shares equal to $X, pursuant to section 360-30?

Summary

Provided you receive the notice of determination, and it outlines your entitlement to 100% of the notional tax offset, then you will be entitled to the full tax offset for shares purchased in the Company.

Detailed reasoning

Amount of the tax offset - General case - Section 360-25

25.          Entities that acquire newly issued shares in an Australian ESIC may receive a non-refundable carry-forward tax offset of 20% of the value of their investment subject to a maximum offset cap amount of $200,000 provided they satisfy conditions outlined in subsection 360-15(1).

Amount of tax offset - Members of trusts or partnerships - Section 360-30

26.          Section 360-30 applies if a member of a trust or partnership is entitled to the tax offset for an income year under subsection 360-15(2).

27.          Subsection 360-30(1) calculates the amount of tax offset that can be claimed by a member of a trust or partnership as the member's share of notional tax offset multiplied by the notional tax offset amount:

-               determined share of 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.

28.          However, the amount worked out under subsection 360-30(1) is to be reduced to the extent necessary to ensure that the sum of the following does not exceed $200,000:[3]

29.          Subsection 360-30(2) provides that a member's share may be determined by the trustee or partnership as a percentage of the notional tax offset amount.

30.          Subsection 360-30(5) requires that the sum of all percentages determined in relation to all members does not exceed 100% of the amount that the trust or partnership would be entitled to if it was an individual investor.

31.          Subsection 360-30(3) provides that if, under the terms of a trust or partnership, a member would be entitled to a fixed proportion of any capital gain if any asset were disposed of at the end of the income year, then the member's share of the tax offset must be equivalent to that fixed proportion. Consequently, a determination of any other percentage has no effect for calculating the member's share of the tax offset. Apart from this requirement in subsection 360-30(3), there are no other requirements about what share of the tax offset should be distributed to each member.

Application of the law to your facts

32.          The Trust would be entitled to the tax offset if it were an individual under subsection 360-15(1) for the 20XX income year. You as a member of the trust are entitled to the tax offset for that year per subsection 360-15(2).

33.          Subsection 360-30(1) calculates the amount of tax offset that can be claimed by a member of a trust as the member's share of the tax offset multiplied by the amount referred to as the notional tax offset amount. The notional tax offset amount is defined to be the amount of the trust's tax offset calculated under section 360-25 as if the entity had been an individual, i.e., 20% of the amount paid for the shares issued to the Trust.

34.          You have not been issued a written notice of determination under subsection 360-30(4), which outlines your entitlement to the notional tax offset worked out under subsection 360-30(1).

35.          Provided you receive the notice of determination, and it outlines your entitlement to 100% of the notional tax offset, then you will be entitled to the full tax offset for shares purchased in the Company.

Conclusion

36.          You will be entitled to receive 100% of the available tax offset calculated under section 360-30 provided you receive the notice of determination pursuant to subsection 360-30(4), which outlines such entitlement.

Question 3

Will the Commissioner grant discretion to extend the period in which the trustee must give the notice under paragraph 360-30(4)(b)?

Summary

The Commissioner will grant discretion to extend the period for you to provide the notice of determination until XX/XX/XXXX under paragraph 360-30(4)(b).

Detailed reasoning

37.          Subsection 360-30(4) states:

The trustee or partnership must give the *member written notice of the determination. The notice:

(a)          must enable the member to work out the amount of the member's *tax offset by including enough information to enable the member to work out the member's share of the notional tax offset.

(b)          must be given to the member within 3 months of the end of the income year, or within such further time as the Commissioner allows.

Application of the law to your facts

38.          You did not provide a written notice of determination to any members of the Trust within three months of the end of the 20XX income year.

39.          On XX/XX/XXXX, you requested the Commissioner provide further time for you to make available the notice of determination.

40.          The Commissioner will grant discretion to extend the period for you to provide the notice of determination until XX/XX/XXXX, per paragraph 360-30(4)(b).

Question 4

If the shares are owned for at least 12 months, are you entitled to a modified capital gains tax treatment in section 360-50?

Summary

Provided you hold the shares for at least 12 months, you are entitled to the modified capital gains treatment for shares issued by the Company under section 360-50.

Detailed reasoning

Modified CGT Treatment - section 360-50

41.          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.[4]

Shares held for more than 12 months and less than 10 years

42.          An investor that has continuously held a qualifying share for between 12 months and less than ten years may disregard a capital gain it makes from a CGT even happening in relation to the share, however it must disregard any capital loss.[5]

Shares held for 10 years or more

43.          An investor that has continuously held a qualifying share for at least 10 years will receive a market value, as determined on the 10 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.[6]

Application of the law to your facts

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

45.          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 subsection 360-50(5).

46.          Provided you hold the shares for at least 12 months, you are entitled to the modified capital gains treatment for shares issued by the Company under section 360-50.

[1] Paragraph 2.37 in the EM.

[2] Paragraph 2.40 in the EM.

[3] Subsection 360-30(1A).

[4] Subsection 360-50(2).

[5] Subsections 360-50(3) and (4).

[6] Subsection 360-50(5).