Private ruling: Tax incentives for investors in a qualifying early stage innovation company
Date of advice: 13 April 2021
Published: June 2021
Ruling period: 1 July 20xx to 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Question 1: | Is the Investor entitled to a tax offset for shares purchased in X in xx 20xx for a total consideration of $xx, pursuant to subsection 360-15(2) of the Income Tax Assessment Act 1997 ('ITAA 1997') for the period 1 July 2020 to 30 June 2021? | 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: | Does the issuing of those shares give rise to an entitlement to modified CGT treatment pursuant to section 360-50 of the ITAA 1997? | Answer | Yes

Relevant facts and circumstances: X was incorporated in Australia on XX December 20XX. X has received a Private Ruling confirming the company is a qualifying Early Stage Innovation Company (ESIC) for the 20xx financial year. The Investor received and accepted an offer to purchase xx ordinary shares in X a total consideration of $xx. (the Investment) X resolved to issue and allot XX ordinary shares to the Investment. The shares are not issued under an employee share scheme. The investor has stated that they has no influence over the business affairs of X. The investor holds a relevant certificate issued by a qualified accountant.

Relevant legislative provisions: ITAA 1997 Subdivision 360-A

Reasons for decision: Summary: 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. | Detailed Reasoning - 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. | Detailed Reasoning - 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 XX per cent of the value of their investment subject to a maximum offset cap amount of $200,000 provided they satisfy certain conditions. | Detailed Reasoning - 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 criteria 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 maybe 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 that you manage). | Detailed Reasoning - Other Investors: For other (non-sophisticated) investors a total annual investment limit of $XX,000 applies. These investors will not be entitled to a tax offset if their investment exceeds this maximum threshold. | Detailed Reasoning - 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. | Detailed Reasoning - 30 per cent equity interest restriction - Section 328-125: To qualify for the tax offset, the investor entity must not hold more than XX 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. | Detailed Reasoning - Members of trusts or partnerships - Section 360-30: A member of a trust or partnership, being a beneficiary or unit holder of a 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, if the trust or partnership were an individual and 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. | Detailed Reasoning - 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. | Detailed Reasoning - Modified CGT Treatment - section 360-50: 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 as per paragraph 360-50(2). The specific CGT consequence arising for these shares depends 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. | Detailed Reasoning - Shares held for more than 12 months and less than ten years: An investor that has continuously held a qualifying share for between 12 months and less than ten years may disregard a capital gain arising from the share however it must disregard any capital loss as persubsections 360-50(3) and (4) | Detailed Reasoning - Shares held for 10 years or more: An investor that has continuously held a qualifying share for at least ten years will receive a market value, as determined on the ten-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 as persubsection 360-50(5). | Detailed Reasoning - Conclusion: The Investor has demonstrated that they satisfy the requirements under Subdivision 360-A of the ITAA 1997 and are entitled to the tax offset, as determined by the Trustee, and the trust is entitled to the modified capital gains treatment for shares issued by a qualifying ESIC for the year ending 30 June 2021.