Private ruling: Early Stage Innovation Company entitlement to offset
Date of advice: 12 March 2018
Published: July 2018
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: In respect of the shares issued by Company A on Date A, is Person A entitled to the tax offset under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: In respect of the shares issued by Company A on Date B, is Person A entitled to the tax offset under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes | Q3: In respect of the shares issued by Company A on Date C, is Person A entitled to the tax offset under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes | Q4: In respect of the shares issued by Company A on Date D, is Person A entitled to the tax offset under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A4: Yes

Relevant facts and circumstances: 1. Person A is a shareholder in Company A and had shares issued on Dates A to D. 2. Company A has received private rulings concluding that for the years ended 30 June 20XX and 20XX it meets the criteria of an Early Stage Innovation Company (ESIC) under subsection 360 40(1) of the ITAA 1997. 3. Person A is a beneficiary of the Trust A which is also a shareholder in Company A. In respect of its shares it has received two private rulings (authorisation numbers XXXXXXXXXXXXX and XXXXXXXXXXXXX) ruling that they would be eligible for the offset under section 360-15 of the ITAA1997. 4. On Date D Trust A held X% of the equity interest in Ingeneration. 5. In their capacity as sole director and secretary of Company B which is the trustee of Trust A, Person B (Person A’s sibling) has authorised the ATO to use the information previously provided by Company B in respect of Trust A’s relationship with Company A in making this ruling in respect of Person A’s eligibility for the offset under section 360-15 of the ITAA1997. 6. The change in the relationship between Company A and Trust A was detailed in the application for this ruling. 7. On Date D, the date of Person A’s last purchase of Company A shares, Company A’s Founder held X% of the equity interest in Company A which is the lowest percentage of ownership ever held. On the same date Person A held Y% of the equity interest in Company A. 8. ASIC records show that all shares issued to Person A are ordinary shares in Company A. 9. Person A is also a beneficiary of Trust B which in conjunction with Trust A has business dealings with Company C which in another entity Company A’s Founder has shares in. There is no relationship between Company A and Company C.

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 1-4: All legislative references are to the ITAA 1997 unless otherwise indicated. | Summary: Parson A is entitled to the offset under subsection 360-15(1) for the shares issued on Dates A to D. | Detailed Reasoning - Background 360-15(1): 1. 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 - Company issues shares that are equity interests: 2. The shares issued to Person A represent an equity interest in Company A. | Detailed Reasoning - Subsection 360-40(1) applies to the Company: 3. Company A was an ESIC immediately after the shares were issued. | Detailed Reasoning - Neither the company nor the individual is an affiliate: 4. 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. 5. 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. 6. 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. 7. In rulings issued to Trust A we have already examined Person B’s relationship with Company A as sole director and secretary of Company B and the trustee of Trust A. Person A is beneficiary of Trust A. 8. That examination concluded that in their capacity as sole director and secretary of Company A Person B was not an affiliate of Company A. These conclusions equally apply to Person A as a beneficiary of Trust B. 9. In looking at Person A’s individual shareholding they only held XX% on 22 January 20XX whilst Trust A held XX% of the equity interest. The Founder held XX%. 10. As concluded in the Trust A rulings the Founder of Company A retains control of and makes all of the business decisions in respect of Company A. 11. Therefore in applying the factors outlined above neither Person A nor Company A are affiliates of each other. | Detailed Reasoning - Acquired under an employee share scheme: 16. Person A is not an employee of Company A. Therefore the shares cannot have been acquired under an employee share scheme. | Detailed Reasoning - The individual didn’t hold more than 30% of the equity interests: 17. On Date D the Founder of Company A held more than 70 of the equity interest in Company A, This is the lowest percentage the Founder has ever held. Therefore Person A’s interest cannot have been more than 30% on any of the dates shares were issued. | Detailed Reasoning - Conclusion 360-15(1): 18. Person A is entitled to the offset under subsection 360-15(1) issued on Dates A to D