Private ruling: Early Stage Innovation Company (ESIC)
Date of advice: 27 March 2018
Published: June 2018
Ruling period: 1 XX 20XX to 30 YY 20YY
Date scheme commenced: 1 XX 20XX

Ruling: Q1: Is the taxpayer, Taxpayer A, considered an ‘affiliate’ of Company B pursuant to section 328-130 of the Income Tax Assessment Act 1997 (‘ ITAA 1997 ’)? | A1: No

Relevant facts and circumstances: 1. Taxpayer A is a professional employee in their own Company A. 2. Taxpayer A has also recently commenced employment for Company Z as an employee. 3. Taxpayer A is considering making a $xx.00 investment in Company T, which she considers to be an Early Stage Innovation Company. 4. Taxpayer B is the CEO and founder of Company T and is also Taxpayer A’s spouse. 5. Taxpayer B is one of three directors of Company T – the other directors are Director 1 and Director 2. 6. Taxpayer B is a professional employee and is the Chair of Company M and Company N. Taxpayer B is employed by Company G and also engaged in their own Company B. 7. Company T focuses on the development of IT solutions and is currently considering expanding the business and requires additional investment to do so. 8. Company T has no plans to extend its services to other fields – areas in which Taxpayer A is involved. Information provided 9. You have provided a number of documents containing detailed information in relation to seeking clarification as to whether you’d be considered an ‘affiliate’ of Company T due to your relationship with Taxpayer B, including: a. Private Binding Ruling (‘PBR’) Application, dated DDMMYY b. A Declaration from your tax agent, (Taxagent) 10. We have referred to the relevant information within these documents in applying the relevant tests to your circumstances. Assumption(s) Company T will issue shares to Taxpayer A. Company T will determine if it satisfies the requirements to qualify as an Early Stage Innovation Company pursuant to section 360-40 ITAA 1997 , at the time it issues shares to Taxpayer A. Taxpayer A will consider the remaining investor requirements in section 360-15 ITAA 1997 at the time shares are issued by Company T.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 328-130 | Income Tax Assessment Act 1997 Section 360-15 | Income Tax Assessment Act 1997 Section 360-40 | Income Tax Assessment Act 1997 Section 995.1

Reasons for decision: Summary: The taxpayer, Taxpayer A, is not considered an affiliate of Company T, pursuant to section 328-130 of ITAA 1997 . | Detailed Reasoning - DETAILED REASONING: 11. Section 328-130 of the ITAA 1997 defines the meaning of the term ‘affiliate’. 12. Subsection 328-130(1) defines the term ‘affiliate’ as: “ 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. ” 13. Section 995.1 of the ITAA 1997 defines the term ‘business’ as: “ Includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee. ” 14. Subsection 328-130(2) further outlines: “ 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 share. ” | Detailed Reasoning - APPLICATION TO YOUR CIRCUMSTANCES: 15. Taxpayer A is a professional employee, working at Company Z, and also in their own Company A. 16. As such, Taxpayer A does not have any appropriate expertise or IT skills with which to provide any influence over the business affairs of Company T. 17. Taxpayer B is a professional employee, employed at Company G, and also employed in their own Company B. 18. While Taxpayer A and Taxpayer B are both professionals, their qualifications and expertise are markedly different. 19. As one of three directors of Company T, Taxpayer A shares the responsibility for Company T’s business matters with the other two directors, Director 1 and Director 2. 20. Taxpayer A and Taxpayer B are married, so typically, have both financial and personal dependencies due to their spousal relationship. 21. Neither Taxpayer A nor Taxpayer B act in unison or in partnership or jointly in relation to each other’s business matters. 22. As defined in subsection 328-130(1), the term ‘affiliate’ is an individual or a company, 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. 23. In their respective businesses and private practices, neither Taxpayer A nor Taxpayer B control or influence the management of the other’s business matters. Their business affairs are wholly independent of each other. | Detailed Reasoning - CONCLUSION FOR QUERY RE AFFILIATE TEST: The taxpayer, Taxpayer A, is not considered an affiliate of Company T pursuant to section 328-130 of ITAA 1997 . Provided there is no change in the way Taxpayer A and Company T conduct their business affairs, Taxpayer A can consider the remaining requirements, in Sub-Division 360-A ITAA 1997, for an investor in Company T to be entitled to the Early Stage Investor tax incentives.

REASONS FOR DECISION: All legislative references are to the Income Tax Assessment Act 1997 (‘ ITAA 1997 ’) unless otherwise stated.