Private ruling: Early Stage Innovation Company offset
Date of advice: 13 March 2018
Published: June 2018
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: In respect of the shares issued by Company A on Date A, when determining an entitlement to the tax offset under section 360-15 of the Income Tax Assessment Act 1997 (ITAA 1997), would Fund A have been entitled to the offset under subsection 360-15(1) if it was an individual? | A1: Yes | Q2: In respect of the shares issued by Company A on Date B, when determining an entitlement to the tax offset under section 360-15 of the ITAA 1997, would Fund A have been entitled to the offset under subsection 360-15(1) if it was an individual? | A2: Yes | Q3: In respect of the shares issued by Company A on Date C, when determining an entitlement to the tax offset under section 360-15 of the ITAA 1997, would Fund A have been entitled to the offset under subsection 360-15(1) if it was an individual? | A3: Yes | Q4: In respect of the shares issued by Company A on Date D, when determining an entitlement to the tax offset under section 360-15 of the ITAA 1997, would Fund A have been entitled to the offset under subsection 360-15(1) if it was an individual? | A4: Yes | Q5: In respect of the shares issued by Company A on Date E, when determining an entitlement to the tax offset under section 360-15 of the ITAA 1997, would Fund A have been entitled to the offset under subsection 360-15(1) if it was an individual? | A5: Yes

Relevant facts and circumstances: 1. Company B as trustee for the Fund A is a shareholder of Company A and had shares issued on Dates A to E. 2. Person A is the sole director and secretary of Company B. 3. Company A has received private rulings concluding that for the years ended 30 June 2017 and 2018 it meets the criteria of an Early Stage Innovation Company (ESIC) under subsection 360 40(1) of the ITAA 1997. 4. Person A is the sole director and secretary of Company C which is the trustee of the Trust A. 5. Trust A is also a shareholder in Company A. 6. On Date D Trust A held X% of the equity interest in Company A. 7. In respect of the shares issued to Trust A it has received two private rulings (authorisation numbers 1051244017211 and 1051319235370) ruling that they would be eligible for the offset under section 360-15 of the ITAA1997. 8. In their capacity as sole director and secretary of Company C Person A has authorised the ATO to use the information previously provided in respect of Trust A’s relationship with Company A in making this ruling in respect of Fund A’s eligibility for the offset under section 360-15 of the ITAA1997. 9. Details of the change in relationship between Trust A and Trust B were also provided. 10. As at Date E the Founder of Company A holds X% of the equity interest in the company which is the lowest percentage of ownership he had ever held. Prior to the share issue on Date E the Founder’s shareholding was 70.65%. After the share issue Date E Fund A’s shareholding increased to 9.68% of the equity interest in Company A. 11. ASIC records show that all shares issued to Fund A are ordinary shares in Company A.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 328-130 | Income Tax Assessment Act 1997 Subdivision 360-A | Income Tax Assessment Act 1997 section 360-15

Reasons for decision: Detailed Reasoning - Questions 1-5: All legislative references are to the ITAA 1997 unless otherwise indicated. | Summary: In respect of the shares issued by Company A on Dates A to E Fund A would have been entitled to the offset under subsection 360-15(1). Therefore the trustee of Fund A is entitled to the offset which can be applied again the tax liability of the fund or carried forward by the trustee until such time as the fund has a tax liability in a future year of tax. | Detailed Reasoning - Background 360-15: Trustees- entitlement to offset 1. A trustee for a trust is entitled to the offset under subsection 360-15(3) if they would have been entitled to the offset under subsection 360-15(1). 2. Based on the facts of this case subsection 360-15(3) will apply to the trustee of Fund A. as a result the trustee cannot distribute the offset it receives to the members of the fund. The trustee would have to apply it to the fund’s tax liability or carry it forward until such time as the fund has a tax liability. Individual’s entitlement to offset -360-15(1) 3. An individual is entitled to the offset if: ● at a particular time during the income year, a company issues the individual with equity interests that are shares in the company; ● the company was an ESIC immediately after the shares were issued; ● neither the company or the individual is an affiliate of each other when the shares were issued; ● the issue of those shares is not acquired under an employee share scheme; and ● immediately after the shares were issued, the individual didn’t hold more than 30% of the equity interests in the company or in an entity connected with the company. | Detailed Reasoning - Application to SSI’s circumstances - 360-15(1): Company issues shares that are equity interests 4. The shares issued to Fund A represent an equity interest in Company A. Subsection 360-40(1) applies to the Company 5. Company A was an ESIC immediately after the shares were issued. Neither the company nor the individual is an affiliate 6. The meaning of affiliate is set out in section 328-130. An individual or company is an affiliate of an entity where that individual or company acts, or could reasonably be expected to act: ● in accordance with the entity’s directions or wishes in relation to the affairs of that individual or company’s business; or ● in concert with the entity in relation to the affairs of the individual or company’s business. 7. Subsection 328-130(2) 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. 8. 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: ● family or close personal relationships; ● financial relationships or dependencies; ● relationships created through links such as common directors, partners, or shareholders; ● the degree to which the entities consult with each other on business matters; or ● 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. 9. In rulings issued to Trust A we have already determined Person A’s relationship with Company A. 10. That examination concluded that Person A in their capacity as sole director and secretary of Company C was not an affiliate of Company A. 11. Since that conclusion there has been a change in the relationship. However this would not change the conclusion reached in the rulings issued to Trust A in respect of whether it was an affiliate of Company A. 12. The conclusions reached in respect of Person A’s capacity as sole director and secretary of Trust A equally apply to him/her in their role as sole shareholder, director and secretary of Company B as trustee for Fund A who also has a shareholding in Company A. 13. Therefore Company A and Fund A are not affiliates of each other. Acquired under an employee share scheme 16. Person A is not an employee of Company A. Therefore the shares cannot have been acquired by Fund A under an employee share scheme. The individual didn’t hold more than 30% of the equity interests 17. Facts provided show that Fund A’s equity interest for Dates A to E was not more than 30%. Conclusion 360-15(1) 18. Had subsection 360-15(1) applied to Fund A it would have been entitled to the offset under subsection 360-15(1) for the shares issued Company A on Dates A to E.