Private ruling: ESS interests provided in a start-up company and the definition of a holding company
Date of advice: 16 February 2022
Published: May 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: For the purposes of applying paragraph 83A-33(2)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) if Company A issued ESS interests, would Company B be a 'holding company' of Company A under the Corporations Act 2001 ( Corporations Act )? | A1: No. | Q2: If the answer to Question 1 is no, if Company A issued ESS interests, is Company B one of 'the other companies' in paragraph 83A-33(3)(b) of the ITAA 1997 that must be incorporated for less than ten years under subsection 83-33(3) of the ITAA 1997? | A2: No.

Relevant facts and circumstances: Company A was incorporated in Australia on Date X and its equity interests are not listed for quotation in the official list of any stock exchange. Company B was incorporated in Australia on Date Y and Company B is: • a registered charity with the Australian Charities and Not-for-profits Commission • endorsed by the Commissioner as a deductible gift recipient (DGR) under Item 1 of the table in section 30-15 of the ITAA 1997; and • endorsed by the Commissioner as an income tax exempt entity. Company A holds no shares in any companies and on 30 June 20XX Company B held more than half of the shares on issue in Company A.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 83A-33 | Income Tax Assessment Act 1997 subsection 83A-33(2) | Income Tax Assessment Act 1997 paragraph 83A-33(2)(c) | Income Tax Assessment Act 1997 subsection 83A-33(3) | Income Tax Assessment Act 1997 subsection 83A-33(3)(b) | Income Tax Assessment Act 1997 subsection 83A-33(7) | Income Tax Assessment Act 1997 paragraph 83A-33(7)(b) | Income Tax Assessment Act 1997 subsection 995-1(1) | Corporations Act 2001 section 9 | Corporations Act 2001 section 45

Reasons for decision: Summary: For the purposes of paragraph 83A-33(2)(c), Company B's investment in Company A is disregarded when determining if it is a holding company of Company A. As Company B's investment in Company A is disregarded, it cannot be a holding company of Company A under paragraph 83A-33(2)(c). | Detailed Reasoning - Detailed reasoning: Subsection 83A-33(2) states: This subsection applies to an *ESS interest in a company (the first company ) if no *equity interests in any of the following companies are listed for quotation in the official list of any *approved stock exchange at the end of the first company's most recent income year before you acquired the interest: (a) the first company; (b) any *subsidiary of the first company at the end of that income year; (c) any holding company (within the meaning of the Corporations Act 2001 ) of the first company at the end of that income year; (d) any subsidiary of a holding company (within the meaning of that Act) of the first company at the end of that income year. | Detailed Reasoning - Note:: For identifying any holding company, see also subsection (7). The above subsection applies at a point in time, the test time being the end of the first company's most recent income year. In this instance, as we are ruling in respect of the year ended 30 June 2022, the date of the test time is 30 June 2021. The term 'holding company' is defined in section 9 of the Corporations Act : in relation to a body corporate, means a body corporate of which the first body corporate is a subsidiary. 'Subsidiary' is defined in section 46 of the Corporations Act as follows: A body corporate (in this section called the first body) is a subsidiary of another body corporate if, and only if: (a) the other body: (i) controls the composition of the first body's board; or (ii) is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first body; or (iii) holds more than one-half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or (b) the first body is a subsidiary of a subsidiary of the other body. In addition, the definition in subsection 995-1(1) of 'subsidiary' states: the question whether a company is a subsidiary of another company is to be determined in the same way as the question whether a corporation is a subsidiary of another corporation is determined under the Corporations Act 2001 AS Company B held more than half of the shares in issue in Company A on 30 June 2021, Company A was a subsidiary of Company B under subparagraph 46(a)(iii) of the Corporations Act on that date. As Company A was a subsidiary of Company B under the definition of holding company in section 9 of the Corporations Act, Company B was Company A's holding company on 30 June 2021. However, the note to subsection 83A-33(2) references subsection 83A-33(7) when identifying a holding company, and subsection 83A-33(7) states: For the purposes of subsections (2) and (4), disregard: (a) *eligible venture capital investments by a *VCLP, *ESVCLP or *AFOF; and (b) investments by an *exempt entity that is a *deductible gift recipient; when identifying any holding company (within the meaning of the Corporations Act 2001 ) or working out *aggregated turnover. As Company B is an exempt entity and a DGR, paragraph 83A-33(7)(b) will apply to disregard Company B's investment in Company A when identifying a holding company within the meaning of the Corporations Act . As Company B's investment is disregarded because it is an exempt entity and a DGR, Company B cannot be a holding company of Company A, or any other company, for the purposes of applying paragraph 83A-33(2). A conclusion that an entity that is an exempt entity and a DGR cannot be a holding company for the purposes of subsection 83A-33(2) is supported by paragraph 1.88 of the Explanatory Memorandum to the Tax and Superannuation Laws Amendment (Employee Share Schemes) Bill 2015, which states: In applying any of the grouping rules relating to the listing requirement, the 10 year requirement or the aggregated turnover threshold, any investment by a tax exempt entity which is a deductible gift recipient or an eligible venture capital investment by a venture capital limited partnership, early stage venture capital limited partnership or Australian venture capital fund of funds is to be ignored. The effect of this is that if the only investment by one of those entities is the investment to be ignored, then those entities will not be either a holding company of the company in which the interest is issued or connected with the company in which the interest is issued. [Schedule 1, item 6, subsection 83A-33(7)] | Detailed Reasoning - Question 2: If the answer to Question 1 is no, if Company A issued ESS interests, is Company B one of 'the other companies' in paragraph 83A-33(3)(b) of the ITAA 1997 that must be incorporated for less than ten years under subsection 83-33(3) of the ITAA 1997? | Summary: Paragraph 83A-33(3)(b) refers to 'each of the other companies referred to in subsection (2)'. As Company B is an exempt entity and a DGR, it cannot be a holding company of Company A under subsection 83A-33(2), even though Company B held more than half of the shares on issue in Company A on 30 June 2021. As Company B is not a holding company of Company A for the purpose of subsection 83A-33(2), when determining the 'other companies' referred to in subsection 83A-33(3)(b), Company B is not one of those other companies. The fact that on 30 June 2021 Company B could have been incorporated more than 10 years before that date is not relevant to the application of paragraph 83A-33(3)(b), as Company B is not one of the other companies that must be referred to and tested in paragraph 83A-33(3)(b). | Detailed Reasoning - Detailed reasoning: Subsection 83A-33(3), states: This subsection applies to an *ESS interest in a company if: (a) the company (the first company ); and (b) each of the other companies referred to in subsection (2); was incorporated by or under an *Australian law or *foreign law less than 10 years before the end of the first company's most recent income year before you acquired the interest. Paragraph 83A-33(3)(b) refers to the companies that have been identified for the purposes of applying subsection 83A-33(2). In looking at a company's relationship to Company A, it is only the companies that have been identified and tested under subsection 83A-33(2) that need to have been incorporated for less than 10 years before the end of the previous income year. As Company B's investment in Company A was disregarded when identifying the holding company of Company A, Company B was not one of the companies that was tested under subsection 83A-33(2). As Company B was not tested in respect of subsection 83A-33(2), Company B is not one of the 'other companies referred to in subsection (2)', that is also referred to in paragraph 83A-33(3)(b), that must be incorporated for less than 10 years before the end of the previous income year. The exclusion of an exempt entity that is a DGR from the 'incorporated for less than ten years' requirement under paragraph 83A-33(3)(b), because of their investments being disregarded under subsection 83A-33(7) when identifying a holding company under subsection 83A-33(2), is also supported by paragraph 1.88 of the EM.

Reasons for decision: All legislative references are to the ITAA 1997 unless otherwise indicated. | For the purposes of applying paragraph 83A-33(2)(c), if Company A issued ESS interests, would Company B be a 'holding company' of Company A under the Corporations Act ?