Edited version of private advice

Authorisation Number: 5010097926826

Date of advice: 1 December 2023

Ruling

Subject: Fixed trust

Question

Will the Commissioner allow further time pursuant to paragraph 360-30(4)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) for Company A Pty Ltd as The Trustee for the B Trust to give notice to members of its determination of the percentage that is the member's share of the notional tax offset in respect of the YYYY income year?

Answer

Yes, the Commissioner will allow further time until DD MM YYYY for Company A Pty Ltd as The Trustee for the B Trust to give notice to members of its determination of the percentage that is the member's share of the notional tax offset in respect of the YYYY income year pursuant to paragraph 360-30(4)(b) of the ITAA 1997.

This private ruling applies for the following period:

Income year ended DD MM YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company A Pty Ltd, ACN XXX XXX XXX, acts as The Trustee for the B Trust (Trust) established by settlement dated DD MM YYYY.

The Trust is a discretionary trust with a designated beneficiary and class of general beneficiaries.

On DD MM YYYY, the Trust acquired XXXX newly issued ordinary shares (Shares) in Company C (C), ACN XXX XXX XXX for $XXXXXX.

The Shares were not issued under an employee share scheme.

The Trust has not acquired shares in any other Early Stage Innovation Company (ESIC).

On DD MM YYYY, Company C obtained a favourable ruling (ESIC Ruling), authorisation number XXXXXXXXXX, that Company C satisfies the criteria of the principles-based innovation test pursuant to paragraph 360-40(1)(e) of the ITAA 1997 and the criteria of the foreign company test pursuant to paragraph 360-40(1)(f) of the ITAA 1997 for the year ended DD MM YYYY.

In the facts for that ruling Company C confirmed it meets all other criteria to qualify as an ESIC other than those addressed in the ESIC Ruling.

Immediately after the issue of the Shares, the Trust did not hold more than 30% of the equity interests in Company C (directly or indirectly).

Company C is not an affiliate of the Trust and Company A Pty Ltd has no influence over the business affairs of Company C.

Company A Pty Ltd has not previously issued a notice pursuant to subsection 360-30(4) of the Income Tax Assessment Act 1997 in respect of the YYYY income year.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 subsection 360-30(1)

Income Tax Assessment Act 1997 subsection 360-30(4)

Reasons for decision

These reasons for decision accompany the Notice of private ruling for The Trustee for B Trust.

This is to explain how we reached our decision. This is not part of the private ruling.

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

Question

Will the Commissioner allow further time pursuant to paragraph 360-30(4)(b) of the Income Tax Assessment Act 1997 for Company A Pty Ltd, ACN XXX XXX XXX as The Trustee for the B Trust to give notice to members of its determination of the percentage that is the member's share of the notional tax offset in respect of the YYYY income year?

Answer

Yes, the Commissioner will allow further time until DD MM YYYY for Company A Pty Ltd as The Trustee for B Trust to give notice to member/s of its determination of the percentage that is the member's/s' share of the notional tax offset in respect of the YYYY income year pursuant to paragraph 360-30(4)(b).

Summary

The Commissioner will allow further time until DD MM YYYY for the Trustee for B Trust to issue written notice of its determination of the percentage that is the member's share of the notional tax offset in respect of the YYYY income year in conformation with subsection 360-15(2), subsection 360-30(1) and subsection 360-30(4) of the ITAA 1997.

Detailed reasoning

Division 360 - early stage investors in innovation companies

Tax incentives for early stage investors in innovation companies

Division 360 outlines the criteria for an investor purchasing new shares in a qualifying 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

Entitlement to the tax offset - section 360-15

Section 360-15 provides that the tax incentives are available to all types of investors, regardless of their preferred method of investment (whether an investment is made directly as a corporation or individual or indirectly through a trust or partnership) other than 'widely held companies' (as defined in section 995-1) and 100 per cent subsidiaries of these companies provided certain conditions are met and restrictions do not apply.

Limited entitlement for certain kinds of investors - section360-20

Entities that acquire newly issued shares in an Australian ESIC may receive a non- refundable carry-forward tax offset of 20 per cent of the value of their investment subject to a maximum offset cap amount of $200,000 provided they satisfy certain conditions.

Sophisticated investors - sections 708(8) or (10) or (11) of the Corporations Act 2001

There are no restrictions on the amount an entity may invest if the entity meets the requirements of the Sophisticated Investor Test as described 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. The sophisticated investor test is used for investment opportunities that have reduced disclosure requirements, on the basis that investors that meet this criterion 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 may be a sophisticated investor if they meet one of the following requirements:

              i.                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

             ii.                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

           iii.                you are offered the qualifying shares 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

           iv.                you meet the requirements of being a 'professional investor' under the Corporations Act 2001 (such as a financial services licensee), or

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

Other investors

For other (non-sophisticated) investors a total annual investment limit of $50,000 applies. These investors will not be entitled to a tax offset if their investment exceeds this maximum threshold.

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

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.

Thirty per cent equity interest restriction - section 328-125

To qualify for the tax offset, the investor entity must not hold more than 30 per cent of the equity interests of an ESIC, including any entities 'connected with' the ESIC, tested immediately after the time relevant equity interests are issued.

Members of trusts or partnerships - section 360-30

A member of a trust or partnership, being a beneficiary or unit holder of a trust, or a partner in a partnership (section 960-130) at the end of an income year is entitled to a carry-forward tax offset for that income year, provided that if the trust or partnership were an individual it would be entitled to a tax offset.

The amount of the offset is determined by the:

•                     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.

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).

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 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 or partnership's tax offset calculated under section 360-25 as if the entity had been an individual.

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. 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.

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.

Subsection 360-30(4) requires that the trustee or partnership must give the member written notice of the determination made about their share of the tax offset. The notice must include enough information to enable the member to work out the member's share of the notional tax offset. The notice must be given to the member within 3 months of the end of the income year, or within a further time allowed by the Commissioner.

Trustee of a trust - section 360-15(3)

A trustee of a trust is entitled to a tax offset for an income year if:

a.            the trustee would be entitled to a tax offset, under subsection (1), for the income year if the trustee were an individual, and

b.            the trustee is liable to be assessed or has been assessed, and is liable to pay tax, on a share of, or all or a part of, the trust's net income under section 98, 99 or 99A of the Income Tax Assessment Act 1936 for the income year.

Application to your circumstances

Entitlement to the tax offset - subsections 360-15(1) and (3)

As the tax incentives are available to all types of investors other than 'widely held companies' (as defined in section 995-1) and 100 per cent subsidiaries, The Trustee for B Trust satisfies paragraphs 360-15(1) and (3) as it would be entitled to a tax offset if the trust were an individual, provided that it satisfies the criteria under paragraphs 360-15(1)(b) to (f) and the requirements under section 360-20.

Issued with equity interests which are shares in the company - paragraph 360-15(1)(b)

The Trustee for B Trust was issued with equity interests that were shares in Company C on DD MM YYYY. Therefore, it satisfies subparagraph 360-15(1)(b).

Subsection 360-40(1) applies to the ESIC - paragraph 360-15(1)(c)

The Trustee for B Trust has been provided with advice that Company C has met the criteria of an ESIC for the year ended DD MM YYYY. Therefore, paragraph 360-15(1)(c) is satisfied.

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

Company C is not an affiliate of the The Trustee for B Trust and Company B Pty Ltd has no influence over the business affairs of Company C. Therefore, paragraph 328-130 is satisfied.

Employee share scheme - paragraph 360-15(1)(e)

The shares issued to The Trustee for B Trust were not issued under an employee share scheme. Therefore, paragraph 360-15(1)(e) is satisfied.

Thirty per cent equity interest restriction - paragraph 360-15(1)(f)

To qualify for the tax offset, the investor entity must not hold more than 30 per cent of the equity interests of an ESIC, including any entities 'connected with' (paragraph 328-125) the ESIC, tested immediately after the time relevant equity interests are issued.

The Trustee for B Trust has stated that it did not hold more than 30% of the equity interests in Company C ('the ESIC') immediately after the issue of its shares by Company C on DD MM YYYY, that carried any of the rights under subparagraphs 360-15(1)(f)(i), (ii) or (iii).

Therefore, The Trustee for B Trust satisfies paragraph 360-15(f).

Limited entitlement for certain kinds of investors - section 360-20(1)(a) and (b)

Restrictions apply to the amount and entitlement of the offset as provided in paragraphs 360(20)(1) and (b) which relate to a type of investor.

Under the Corporations Act 2001, 'sophisticated investors' who meet certain requirements don't have to be provided with a disclosure document, such as a prospectus or product disclosure statement, when being offered shares in a company. Our document entitled Tax incentives for early stage investors, available on our website ato.gov.au using quick code QC 48899 includes examples of when an entity may be a sophisticated investor. This includes an example where an entity (including a trust) 'have paid at least $500,000 for the qualifying shares (either as a single offer or including any amounts you have previously paid for the same class that you hold in the same company)'.

The Trustee for B Trust made an investment of $XXXXX for XXXXX shares in Company C on DD MM YYYY. Consequently, The Trustee for B Trust is considered to be a 'sophisticated investor' for the purposes of the Corporations Act 2001, and therefore paragraph 360-20(1)(a) does not apply.

Notwithstanding that The Trustee for B Trust has advised that their investment was greater than $XXXXXX in the year ended DD MM YYYY, they qualify as a sophisticated investor and therefore paragraph 360-20(1)(b) does not preclude them from satisfying paragraph 360-15(1)(b) due to the operation of subsection 360-20(1).

Therefore, the limitations under section 360-20 on the amount paid for shares will not apply in relation to The Trustee for B Trust's issue of shares in Company C for the year ended DD MM YYYY.

Members of trusts or partnerships - section 360-30

Subsection 360-30(4) requires that the trustee or partnership must give the member written notice of the determination made about their share of the tax offset. The notice must include enough information to enable the member to work out the member's share of the notional tax offset. The notice must be given to the member within 3 months of the end of the income year, or within a further time allowed by the Commissioner.

The Shares were issued on DD MM YYYY, the relevant income year is the year ended DD MM YYYY. Consequently, The Trustee for B Trust was required to give the notice of the determination pursuant to subsection 360-30(4) to its members by DD MM YYYY.

The trust did not give notice to its members by DD MM YYYY; therefore, the trustee requested the Commissioner to allow further time.

There was uncertainty as to whether Company C qualified as an ESIC just after the Shares were issued and whether, in turn, the Trust (and its members) were eligible for the concessions available under Division 360.

On DD MM YYYY, Company C obtained a favourable ESIC Ruling confirming that it qualified as an ESIC for the YYYY income year, which includes the period just after the Shares were issued.

The uncertainty surrounding the ESIC status of Company C provides a reasonable explanation as to why the trustee of the Trust did not issue the notice of determination pursuant to subsection 360-30(4) within the specified timeframe.

Conclusion

The Commissioner will allow further time until DD MM YYYY for The Trustee for B Trust to issue written notice of its determination of the percentage that is the member's share of the notional tax offset in respect of the YYYY income year in conformation with subsection 360-15(2), subsection 360-30(1) and subsection 360-30(4) of the ITAA 1997.