Edited version of private advice

Authorisation Number: 1052142527782

Date of advice: 14 July 2023

Ruling

Subject: Early stage innovation company - investor tax offset

Question 1

Are the requirements under section 360-15 of the Income Tax Assessment Act 1997 (ITAA 1997) met for the year ended 30 June 20XY in respect of Trust A's acquisition of shares in Company A?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XY

The scheme commenced on:

A date in the income year

Relevant facts and circumstances

1.      A Pty Ltd (the Trustee) is the trustee for Trust A (the Trust). The sole director and shareholder of the Trustee company is Individual A.

2.      The Trust is a discretionary trust that was established by deed of settlement on a date.

3.      The Commissioner issued a private binding ruling to Company A, in which the Commissioner ruled that, for the relevant period, Company A met the criteria of an Early-Stage Innovation Company under subsection 360-40(1) of the ITAA 1997.

4.      Company A issued ordinary shares to Trust A on a date during the relevant period.

5.      Company A had three directors when the shares were issued to Trust A.

6.      When the shares were issued to the Trust their total ordinary shares in Company A represented 3.53% of the ordinary shares issued.

7.      One of the directors of Company A is the son of Individual A.

8.      Entities that are associated with the son, held 19.5% of the shares in Company A when the shares were issued to Trust A.

9.      All individuals and entities referred to above are Australian residents for tax purposes.

10.   The Trustee has given a written notice to members within 3 months after the end of the income year as per the requirements in subsection 360-30(4) of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-125

Income Tax Assessment Act 1997 Section 360-15(1)

Income Tax Assessment Act 1997 Section 360-15(2)

Income Tax Assessment Act 1997 Section 360-25

Income Tax Assessment Act 1997 Section 360-30

Income Tax Assessment Act 1997 Section 360-50

Reasons for decision

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

Question 1

Are the requirements under section 360-15 met for the year ended 30 June 2020 in respect of the Trust's acquisition of shares in Company A?

Summary

The requirements under section 360-15 are met for the year ended 30 June 2020 in respect of the Trust's acquisition of shares in Company A.

Detailed reasoning

1.    If you invest in a qualifying ESIC, you may be eligible for the early-stage investor tax incentives. The tax incentives for early-stage investors are contained in Subdivision 360-A.

2.    The early-stage investor tax offset is available, in the general case, if all of the following conditions in subsection 360-15(1) are satisfied:

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;

(ii) 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 the issue 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.

3.    The Trust is a trust and is therefore eliminated under subparagraph 360-15(1)(a)(i). However, subsection 360-15(2) states that a member of a trust would be entitled to the tax offset for an income year if:

a.    the trust would be entitled to a tax offset, under this section, for the income year if the trust were an individual; and

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

4.    Based on paragraph 360-15(2)(a), we need to treat the Trust as an individual as we look at the remaining criteria in subsection 360-15(1) to determine whether they would be eligible for the tax offset.

5.    Company A issued the Trust with equity interests on a date at a particular time during the income year, therefore paragraph 360-15(1)(b) is satisfied.

6.    Company A was an ESIC under subsection 360-40(1) immediately after it issued those shares to the Trust as confirmed in the Private Binding Ruling issued to Company A for the relevant period, therefore paragraph 360-15(1)(c) is satisfied.

Affiliate test

Definition of "Affiliate"

7.    Paragraph 360-15(1)(d) states that you are entitled to a tax offset for an income year if neither you nor the company is an affiliate of each other at that point in time, that is, the date the shares in the ESIC company were issued.

8.    Section 995-1 defines the term 'affiliate' as having the meaning given by section 328-130.

9.    "Affiliate" is defined under section 328-130 as follows:

Meaning of affiliate

(1) An individual or a 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 individual or company.

(2) However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company.

10.  Subsection 360-15(2) states that:

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 would be entitled to a tax offset, under this section, for the income year if the trust or partnership were an individual; and

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

11.  Even though the meaning of "Affiliate" above refers only to an individual or a company, paragraph 360-15(2)(a) treats a member of a trust as an individual for the purpose of section 328-130.

12.  Whether an affiliate relationship exists between the Trust and Company A or vice versa, is a question of fact.

13.  The Trust held a 3.53% interest in Company A.

14.  Company A and the Trustee have separately constituted boards. The director of the Trustee of the Trust is Individual A. Company A had three directors when the shares were issued to the Trust

15.  All decisions of Company A required the consideration and consent of at least two of the three directors. Two of the three directors do not have a family relationship with Individual A.

16.  One of the directors of Company A, is the son of Individual A, who is the sole director and shareholder of the corporate Trustee of the Trust. Entities associated with the son held 19.5% of the shares in Company A.

17.  Immediately after the issue of the ordinary shares in Company A to the Trust, the Trust was only one of several shareholders in Company A. Given the scale of the operations of Company A, it is not reasonable to expect that the Trust's minority 3.53% interest would provide it with any capacity to influence or direct Company A in the conduct of its business.

18.  Due to the factors above, the relatively small interest held by the Trust, the presence of many other investors, and the requirement that at least two directors agree on any course of action, there is no reasonable expectation that Company A would act in accordance with the directions or wishes, or in concert with the Trust in relation to the affairs of the business when the shares were issued, or vice versa.

19.  Therefore, the Trust andCompany A were not affiliates at the time those shares were issued, and paragraph 360-15(1)(d) is satisfied.

ESS interests

20.   The issue of the shares to the Trust was not an acquisition of ESS interests under an employee share scheme, therefore paragraph 360-15(1)(e) is satisfied.

Holding more than 30% test

21.  Paragraph 360-15(1)(f) requires that the Trust did not hold more than 30% of the equity interests in Company A or an entity connected with Company A that carry the right to:

(i)      receive more than 30% of any distribution of income by Company A; or

(ii)     receive more than 30% of any distribution of capital by Company A; or

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

22.  The Trust held 3.53% of the ordinary shares in Company A immediately after those shares were issued. This entitled the Trust to receive 3.53% of any income or capital distributions and to exercise 3.53% of the votes in Company A.

23.  The Trust did not hold more than 30% of the equity in Company A, or of the equity interests in any one single entity connected with Company A. Therefore, we consider that paragraph 360-15(1)(f) is satisfied.

Conclusion

24.  The requirements in subsection 360-15(1) have been met.

25.  The Trustee gave a written notice to members within 3 months after the end of the income year, as per the requirements in subsection 360-30(4).

26.  Therefore, the members of the Trust are entitled to a tax offset in accordance with section 360-30 of the ITAA 1997 for the year ended X June 20XY in relation to shares acquired by the Trust in Company A.