Edited version of private advice

Authorisation Number: 1052023866795

Date of advice: 24 August 2022

Ruling

Subject: ESIC tax offset

Question 1

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

Answer

Yes.

Question 2

Is SF entitled to a tax offset in accordance with section 360-25 of theITAA 1997 for the year ending 30 June 20XX for the shares SF acquired in the Company?

Answer

Yes.

Question 3

Does section 360-50 of the ITAA 1997 apply to the shares issued to SF by the Company?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.      The members of SF are A and B.

2.      SF Pty Ltd is the trustee for the SF.

3.      SF Pty Ltd has 2 ordinary shares on issue which are held by A and B respectively.

4.      A and B are the directors of SF Pty Ltd

5.      UT was established in 2019.

6.      In 20XX SF acquired units in UT.

7.      In 20XX the business and assets of UT were transferred to the Company, in consideration for which the Company issued ordinary shares to the unitholders of UT. Each unitholder received the same number of shares in the Company as the units they held in UT.

8.      Immediately after the ordinary shares in the Company issued to SF, SF held less than 5% of the ordinary shares in the Company, which carried the right to receive:

•      less than 5% of any distribution of income by the Company

•      less than 5% of any distribution of capital by the Company, and

•      less than 5% of the total voting power in the Company

9.      The shares issued to SF were not acquired under an employee share scheme

10.   None of the other shareholders of the Company were affiliates of SF, the directors of SF Pty Ltd, or the members of SF within the meaning of section 328-130 of the ITAA 1997, and none of the other shareholders of the Company were connected with SF within the meaning of section 328-125 of the ITAA 1997.

11.   SF and the Company were not affiliates of each other in 20XX.

12.   At no time have the directors of SF Pty Ltd or the members of SF had any active involvement in the operations or the business of the Company. None of the Directors of SF Pty Ltd or the Shareholders of SF Pty Ltd were directors of the Company. The Company operated wholly independently of SF, and SF was operated wholly independently of the Company.

13.   There was no commercial relationship between SF and the Company other than SF being a shareholder of the Company.

14.   In 20XX a qualified accountant issued a certificate confirming that SF was a sophisticated investor, in accordance with subsection 708(8)(c) of the Corporations Act 2001.

15.   The Commissioner of Taxation issued a private ruling confirming that the Company was an Early Stage Investment Company in the relevant period.

Relevant legislative provisions

Section 708 of the Corporations Act 2001

Section 328-130 of the Income Tax Assessment Act 1997

Division 360 of the Income Tax Assessment Act 1997

Subsection 360-15 of the Income Tax Assessment Act 1997

Section 360-20 of the Income Tax Assessment Act 1997

Section 360-25 of the Income Tax Assessment Act 1997

Section 360-50 of the Income Tax Assessment Act 1997

Section 960-100 of the Income Tax Assessment Act 1997

Sub-division 974-C of the Income Tax Assessment Act 1997

Section 974-75 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Summary

Detailed reasoning

Division 360 of the ITAA 1997 outlines the requirements 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.

Subsection 360-15(1) of the ITAA 1997 sets out the requirements to be entitled to the tax offset:

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

(a)    you are none of the following:

(i) a trust or a partnership;

(ia) 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 interests 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; and

(f)     immediately after those shares were issued, 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.

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

(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.

There are no restrictions on the amount an entity may invest if the entity meets the requirements of a sophisticated investor 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. Sophisticated investors do not need to be provided with a disclosure document when being offered shares in a company on the basis that investors that meet the requirements 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:

•           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

•           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

•           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

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

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

Not a trust, partnership, ESVCLP or widely held company

The Explanatory Memorandum to the Tax Laws Amendment (Tax Incentives for Innovation) Act 2016 provides that the tax offset is available to all types of investors other than widely held companies. Investors can be any entity within the meaning of section 960-100 of the ITAA 1997 (paragraph 1.16). Under section 960-100 a 'superannuation fund' is an entity separate to a trust.

SF is a 'superannuation fund' for the purposes of the ITAA 1997. As SF is a superannuation fund and not a trust, partnership, ESVCLP or widely held company, paragraph 360-15(1)(a) of the ITAA 1997 is satisfied.

Company issues shares that are equity interests

Sub-division 974-C of the ITAA 1997 sets out what an equity interest of a company is and provides that an equity interest in a company includes 'an interest in the company as a member or stockholder of a company' (subsection 974-75(1) of the ITAA 1997).

The ordinary shares issued by the Company to SF are equity interests in a company and paragraph 360-15(1)(b) of the ITAA 1997 is satisfied.

Subsection 360-40(1) applies to the Company

The Commissioner of Taxation issued a ruling that confirms for the relevant period the Company was an ESIC.

Immediately after the ordinary shares in the Company were issued to SF, the Company was an ESIC under subsection 360-40(1) of the ITAA 1997. Therefore, paragraph 360-15(1)(c) of the ITAA 1997 is satisfied.

Not affiliates

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 the that individual or company.

Subsection 328-130(2) of the ITAA 1997 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.

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:

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.

The directors of SF Pty Ltd and the members of SF have not had any active involvement in the operations or the business of the Company. The Directors of SF Pty Ltd and the Shareholders of SF Pty Ltd have not been directors of the Company. The Company was operated wholly independently of SF, and SF was operated wholly independently of the Company. At no stage has SF had any influence on the manner in which the Company conducts its business, nor has the Company had any influence on the manner in which SF conducts its business.

SF has a minor shareholding in the Company, and there was no commercial relationship between SF and the Company other than SF being a shareholder of the Company.

There is no evidence that SF and the Company acted, or would be expected to act, in accordance, or in concert, with each other in relation to their business affairs.

SF and the Company were not affiliates of each other and paragraph 360-15(1)(d) of the ITAA 1997 is satisfied.

Not acquired under an employee share scheme

The shares issued to SF were not acquired under an employee share scheme. Therefore, paragraph 360-15(1)(e) of the ITAA 1997 is satisfied.

Don't hold more than 30% of the equity interests

Immediately after the ordinary shares in the Company issued to SF, SF held equity interests that carried the right to receive:

•         less than 5% of any distribution of income by the Company

•         less than 5% of any distribution of capital by the Company, and

•         less than 5% of the total voting power in the Company

SF's equity interests in the Company were less than 30% and paragraph 360-15(1)(f) of the ITAA 1997 is satisfied.

Section 360-20 of the ITAA 1997

A qualified accountant issued a certificate that confirms that SF was a sophisticated investor under subsection 708(8)(c) of the Corporations Act. Subsection 708(8) applied to remove the need for a disclosure document with regards to the share issue of the Company to SF.

Section 360-20 of the ITAA 1997 does not apply.

Conclusion

As each of the requirements in subsection 360-15(1) of the ITAA 1997 is satisfied, SF is entitled to the tax offset under subsection 360-15(1).

Question 2

Section 360-25 of the ITAA 1997 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.

The Company did not receive any money for the issue of the shares to the unitholders of UT, instead, the Company was transferred the assets and business of UT.

As subsection 360-15(1) of the ITAA 1997 applies in respect of the shares issued by the Company to SF, the amount of the tax offset available in accordance with paragraph 360-25(1)(b), is 20% of an amount equal to the market value of the non-cash benefits received by the Company (assets and business of UT) for the issue of the shares.

SF held units in UT. In consideration for SF transferring its interest in the assets and business of UT to the Company, the Company issued SF shares.

As such, SF's interest in the assets and business UT transferred to the Company (the non-cash benefit) equates to SF's units in UT.

In accordance with section 360-25 of the ITAA 1997, the amount of the tax offset available to SF is 20% of the market value of its interest in the non-cash benefits received by the Company (the assets and business of UT) for the issue of the shares.

The amount of the offset will be capped at $200,000.

You should keep records of how you have calculated the market value of the non-cash benefit received by the company for the shares at the time they issued.

Question 3

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

The ordinary shares issued by the Company to SF 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 the Company to SF.