Private ruling: Early stage innovation company
Date of advice: 4 August 2021
Published: October 2021
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Do you qualify for the early stage investor tax incentives, including modified CGT treatment under section 360-50 of the Income Tax Assessment Act 1997 (ITAA 1997) for the shares you acquired from the Company on X date? | A1: No

Relevant facts and circumstances: You are the Chief Officer for the Company and the Chair of their Board. You are the co-inventor and principal driver of technology the Company obtained. The technology was the result of over 10 years of research and development by a team of researchers that was led by you and another co-inventor at a University. You were issued with a number fully paid ordinary shares in the Company for an amount (amount payable per share just above $nil) on X date, for which you hold the relevant share certificate. When the Company issued the shares to you: • you were not affiliate of the Company or its directors • you did not hold more than 30% of the Company's interests, and • you had confirmation from the Company they were an ESIC immediately after the shares were issued to you. You provided information, to demonstrate that shares were issued to several parties at the just above $nil issue price per share on X and Y dates. No investors agreement, information memorandum or other written documentation was provided by the Company for your consideration on the nature of your investment when you subscribed for these shares on X date. You entered into an agreement on a date after the share issue (the Agreement) to confirm the terms and conditions of your engagement with the Company. The Agreement details the term of your engagement with the company, under which the terms note: • the Executive has served in a role with the company from a date (which was after the issue of this share parcel) The Agreement details the following with regard to your renumeration: The Company shall pay to the Executive (or nominee) the following renumeration package: (a) 500,000 Shares to be issued on the Execution Date; and (b) 500,000 Options to be issued upon the Company being admitted to the Official List on the terms and conditions set out in Schedule 2. On the nature of your consultancy with the Company and how you were renumerated for your services, the following was provided: the Agreement resulted in shares and options being issued as per the agreement. These parcels are not the subject of this private ruling application and it is considered that the ESIC concessions do not apply to the issue of these additional shares. The earlier arrangement, that the Agreement acknowledged had commenced after the share issue that is the subject of this ruling, was success based and as performance hurdles were not satisfied no renumeration or shares were issued (no written information was issued to close out that arrangement) Regarding your share subscription and information on the other shareholders that were offered shares on the X and Y dates, the following was provided: • the Company was looking for individuals with expertise in the innovation, or with some other skills, that could contribute their expertise to the company rather than to contribute funds • you understood the concept of the invention and the 'original founders' invited you on board • you were approached as an individual with expertise in the idea to give ad-hoc advice to the Company • the Company did not have funds to offer employment relationships at that time, however given your background with the University, you became involved in the Company • at the time, there were some discussions that you would become an executive at a later point in time • shareholders that became involved in the Company through the X and Y date share issues were offered these shares because they had some knowledge or expertise that the Company required. The advice or guidance that these shareholders provided the Company was without renumeration and not provided daily, rather at quarterly or ad-hoc discussions as the Company was starting out • the shares that were issued on the X and Y dates for just above $nil per share were difficult to be valued as the Company was a start-up. As expertise rather than volumes of cash was sought from these individuals, the issued price per share was just above $nil • the shares that were issued on other dates shortly thereafter were to additional investors with a goal to seek cash funding. The subscription price for these later issues was greater per share.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 360-A | Income Tax Assessment Act 1997 section 360-15 | Income Tax Assessment Act 1997 section 360-40 | Income Tax Assessment Act 1997 section 360-45 | Income Tax Assessment Act 1997 section 360-50 | Income Tax Assessment Act 1997 Division 83-A | Income Tax Assessment Act 1997 section 83A-10 | Income Tax Assessment Act 1997 section 83A-325

Reasons for decision: Summary: All legislative references are to the ITAA 1997 unless otherwise indicated. You do not qualify for the early stage investor tax incentives as you do not meet the condition in paragraph 360-15(1)(e). Therefore, you are not entitled to modified CGT treatment under section 360-50 for the shares you acquired from the Company on X date. | Detailed Reasoning - Detailed reasoning: 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. 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: (a) you are not a trust, a partnership, an early stage venture capital limited partnership (ESVCLP), a widely held company or a 100% subsidiary of a widely held company, and (b) a company issues, at a particular time during the income year, you with equity interests that are shares in the company, and (c) the company is an ESIC under subsection 360-40(1) immediately after the company issues those shares to you, and (d) you and the company are not affiliates at the time those shares are issued, 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 more than 30% of the equity interests in the company nor an entity connected with the company. Section 360-50 provides modified CGT treatment for early stage investors in innovation companies. Subsection 360-50(1) states this section applies if the issuing of a share to an entity gives rise to an entitlement to a tax offset under this Subdivision. The conditions for entitlement to a tax offset under Subdivision 360-A are those provided in section 360-15. | Detailed Reasoning - Employee Share Schemes (ESS): Division 83-A covers the tax treatment of benefits provided to employees under employee share schemes. The meaning of ESS interest and employee share scheme is set out in section 83A-10. An ESS interest in a company is defined in subsection 83A-10(1) as a beneficial interest in: (a) a share in the company; or (b) right to acquire a beneficial interest in a share in the company. Subsection 83A-10(2) defines an employee share scheme as a scheme under which ESS interests in a company are provided to employees, or associates of employees, (including past or prospective employees) of the company, or a subsidiary of the company, in relation to the employees' employment. | Detailed Reasoning - Relationships Similar to Employment: The employee share scheme provisions in Division 83A also apply to relationships similar to employment, these types of relationships are summarised in section 83A-325. Division 83A applies to an individual covered by column 1 of an item in the following table in section 83A-325 as if: (a) they were employed by the corresponding entity in Column 2 of that item; and (b) the relationship in Column 3 constituted employment. | Detailed Reasoning - and this constituted that employment:: 1 receives, or is entitled to receive, * work and income support withholding payments (otherwise than as an employee) the entity that pays or provides the work and income support withholding payments (or is liable to do so) the relationship because of which the entity pays or provides the work and income support withholding payments to the individual (or is liable to do so). 2 is engaged in service in a foreign country as the holder of an office the entity by whom the individual is so engaged the holding of the office. 3 provides services to an entity (other than services covered by a previous item in this table and services provided as an employee) the entity the * arrangement between the individual and the entity under which those services are provided. Item 3 of the table in section 83A-325 confirms that Division 83A covers individuals who provide services to an entity, as if they were employed by the entity, and the arrangement under which those services are provided constitutes employment. | Detailed Reasoning - The early stage investor tax offset conditions: You are an individual, therefore paragraph 360-15(1)(a) was satisfied. The Company issued you with equity interests that were shares in the Company on X date, therefore paragraph 360-15(1)(b) was satisfied. The Company was an ESIC under subsection 360-40(1) immediately after the Company issued those shares to you, therefore paragraph 360-15(1)(c) was satisfied. You and the Company were not affiliates at the time those shares were issued, therefore paragraph 360-15(1)(d) was satisfied. | Detailed Reasoning - Acquisition of ESS interests under an employee share scheme: In your case, at the time the shares were issued to you on X date, the Company approached you as an individual with expertise in the innovation to give ad-hoc advice to the Company given your background with the University and your understanding of the technology they were seeking to further develop for commercialisation. All of the individuals that were offered shares in the company on the X and Y dates at just above $nil per share became involved in the Company because they had some knowledge or expertise that the Company required. When the Company offered you and the other individuals shares at just above $nil per share, they were seeking individuals with expertise in the innovation that could provide them with advice or guidance. The Company did not have funds to offer employment relationships at that time. At the same time, there were also some discussions with the Company that you would become an executive at a later point in time. At the time you acquired the shares on X date you had an implied arrangement with the Company to provide ad-hoc advice given your expertise in the invention and your employment with the University. You were the co-inventor and principal driver of the technology the Company was seeking to develop and obtain from the University. The technology was the result of a number of years of development by a team of researchers led by you at the University. In the same month the Company issued shares to you and the other individuals with expertise that could assist the company for just above $nil per share, the Company also issued shares to additional investors at a greater price per share. You entered into an Agreement with the Company on Z date, which acknowledges that you were an executive to the Company from an earlier date. Each of the shares issued to you on the X date meet the definition of an ESS interest in the Company, they are a beneficial interest in shares in the Company as defined in subsection 83A-10(1). Under item 3 of the table in section 83A-325, the ad-hoc arrangement that you had with the Company to provide your expertise to them constituted an employment relationship for the purposes of Division 83-A. On X date you were also a prospective employee of the Company, as there were discussions that you would become an executive at a later point in time. Therefore, for the purposes of Division 83A, at the time the shares in question were issued to you, you were in an employee-like relationship with the Company to provide them with ad-hoc advice, irrespective of whether an employment agreement governed the terms of the engagement. In this case given the nature of your relationship with the Company and the circumstances of this share issue, we consider these shares were provided to you in relation to an arrangement similar to employment and they were therefore acquired under employee share scheme as defined in subsection 83A-10(2). | Detailed Reasoning - Conclusion: The operation of section 83A-325 covers the relationship between you and the Company at the time that these shares were issued to you. As the shares were ESS interests acquired under an employee share scheme, you do not satisfy the condition in paragraph 360-15(1)(e). Therefore, you are not entitled to the early stage investor tax offset or the modified capital gains treatment for these shares that were issued by the Company to you.

This ruling applies for the following periods: