Private ruling: CGT - investor entitlement to tax offset
Date of advice: 15 March 2024
Published: 29 April 2024
Ruling period: Year ending 30 June YYYY
Date scheme commenced: DD Month YYYY

Ruling: Q2: Are the members of the A Trust entitled to a tax offset in accordance with section 360-30 of the ITAA 1997 in respect of A Trust's acquisition of shares in a qualifying ESIC? | A2: Yes.

Relevant facts and circumstances: Company A is the trustee for Trust A. Trust A ('the Trust') is an Australian resident discretionary trust established prior to the YYYY year. Company B is an Australian private company which was incorporated in Australia in an income year prior to the year ended on DD Month YYYY. Trust A has been provided with advice that that Company B has satisfied the criteria of an Early Stage Investment Company (ESIC) for the year ending 30 June YYYY. Trust A made an investment of over $xxx,xxxx for shares in Company B on DD Month YYYY. Trust A did not hold more than 30% of the equity interests in Company B ('the ESIC') immediately after the initial issue of its shares in Company B on DD Month YYYY that carried any of the rights under subparagraphs 360-15(1)(f)(i), (ii) or (iii). Trust A has submitted that the Trust did not have any degree of influence over the business affairs of Company B. The applicant states that Trust A is merely a passive investor in Company B. The shares issued to Trust A in Company B were not issued under an employee share scheme. Trust A satisfies the sophisticated investor test.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 360-A | Income Tax Assessment Act 1997 subsection 328-130 | Income Tax Assessment Act 1997 section 360-15 | Income Tax Assessment Act 1997 section 360-20 | Income Tax Assessment Act 1997 section 360-20 | Income Tax Assessment Act 1997 section 360-40

Reasons for decision: Summary: The A Trust is entitled to a tax offset under section 360-15 of the ITAA 1997 for the year ending 30 June YYYY. | Detailed Reasoning - Tax incentives for early stage investors in innovation companies: Division 360 outlines the criteria for an investor purchasing new shares in a qualifying ESIC to be eligible to the following tax incentives: • non-refundable carry forward tax offset equal to 20% of the amount paid for their qualifying investments, capped at a maximum tax offset amount of $200,000 for the investor and their affiliates combined in each income year • modified capital gains tax (CGT) treatment, under which capital gains on qualifying shares that are continuously held for at least 12 months and less than ten years may be disregarded. Capital losses on shares held less than ten years must be disregarded | Detailed Reasoning - Entitlement to the tax offset - Section 360-15: Section 360-15 provides that the tax incentives are available to all types of investors, regardless of their preferred method of investment (whether an investment is made directly as a corporation or individual or indirectly through a trust or partnership) other than 'widely held companies' (as defined in section 995-1) and 100 per cent subsidiaries of these companies provided certain conditions are met and restrictions do not apply. | Detailed Reasoning - Limited entitlement for certain kinds of investors - Section360-20: Entities that acquire newly issued shares in an Australian ESIC may receive a non- refundable carry-forward tax offset of 20 per cent of the value of their investment subject to a maximum offset cap amount of $200,000 provided they satisfy certain conditions. | Detailed Reasoning - Sophisticated Investors- sections 708(8) or (10) or (11) of the Corporations Act 2001: There are no restrictions on the amount an entity may invest if the entity meets the requirements of the Sophisticated Investor Test as described in section 708 of the Corporations Act 2001 (Corporations Act) in relation to a relevant offer of shares at any time in the income year. The sophisticated investor test is used for investment opportunities that have reduced disclosure requirements, on the basis that investors that meet this criteria are more likely to be able to evaluate offers of securities and other financial products without needing the protection of a disclosure document. An entity maybe a sophisticated investor if they meet one of the following requirements: i. you have paid at least $500,000 for the qualifying shares (either as a single offer or including any amounts you previously have paid for shares of the same class that you hold in the same company), or ii. hold a certificate issued by a qualified accountant that confirms the entity (or the controller of a company or trust) meet certain asset and income requirements, or iii. you are offered the qualifying shares through a financial services licensee who is satisfied that you have previous investment experience that allows you to assess the offer and you sign a written acknowledgement that the licensee hasn't given you a disclosure document in relation to the offer, or iv. you meet the requirements of being a 'professional investor' under the Corporations Act 2001 (such as a financial services licensee), or v. you have or control gross assets of at least $10 million (including any assets held by an associate or a trust that you manage). | Detailed Reasoning - Other Investors: For other (non-sophisticated) investors a total annual investment limit of $50,000 applies. These investors will not be entitled to a tax offset if their investment exceeds this maximum threshold. | Detailed Reasoning - The investor and the ESIC must not be affiliates of each other- Section 328-130: To qualify for the tax offset, the ESIC must not be an affiliate of the investor entity, nor can the investor entity be an affiliate of the ESIC at the time the relevant shares are issued. That is, the ESIC must not act, or reasonably be expected to act, in accordance with the investor's directions or wishes, or in concert with the investor, in relation to the affairs of the business of the ESIC and vice versa. | Detailed Reasoning - 30 per cent equity interest restriction - Section 328-125: To qualify for the tax offset, the investor entity must not hold more than 30 per cent of the equity interests of an ESIC, including any entities 'connected with' the ESIC, tested immediately after the time relevant equity interests are issued. | Detailed Reasoning - Members of trusts or partnerships - Section 360-30: A member of a trust or partnership, being a beneficiary or unit holder of a trust, or a partner in a partnership (section 960-130) at the end of an income year is entitled to a carry-forward tax offset for that income year, provided that if the trust or partnership were an individual it would be entitled to a tax offset. The amount of the offset is determined by the: • notional tax offset that is the member's share of the offset as determined by the trustee or partnership; and • notional tax offset amount that is the amount of the offset that would be available to the trust or partnership were it an individual. Section 360-30 applies if a member of a trust or partnership is entitled to the tax offset for an income year under subsection 360-15(2). Subsection 360-30(1) calculates the amount of tax offset that can be claimed by a member of a trust or partnership as the member's share of the tax offset multiplied by the amount referred to as the notional tax offset amount. The notional tax offset amount is defined to be the amount of the trust's or partnership's tax offset calculated under section 360-25 as if the entity had been an individual. Subsection 360-30(2) provides that a member's share may be determined by the trustee or partnership as a percentage of the notional tax offset amount. Subsection 360-30(5) requires that the sum of all percentages determined in relation to all members does not exceed 100% of the amount that the trust or partnership would be entitled to if it was an individual investor. Subsection 360-30(3) provides that if, under the terms of a trust or partnership, a member would be entitled to a fixed proportion of any capital gain if any asset were disposed of at the end of the income year, then the member's share of the tax offset must be equivalent to that fixed proportion. Consequently, a determination of any other percentage has no effect for calculating the member's share of the tax offset. Apart from this requirement in subsection 360-30(3), there are no other requirements about what share of the tax offset should be distributed to each member. Subsection 360-30(4) requires that the trustee or partnership must give the member written notice of the determination made about their share of the tax offset. The notice must include enough information to enable the member to work out the member's share of the notional tax offset. The notice must be given to the member within 3 months of the end of the income year, or within a further time allowed by the Commissioner. | Detailed Reasoning - Trustee of a Trust - Section 360-15(3): A trustee of a trust is entitled to a *tax offset for an income year if: a) the trustee would be entitled to a tax offset, under subsection (1), for the income year if the trustee were an individual; and b) the trustee is liable to be assessed or has been assessed, and is liable to pay *tax, on a share of, or all or a part of, the trust's *net income under section 98, 99 or 99A of the Income Tax Assessment Act 1936 for the income year. | Detailed Reasoning - Entitlement to the tax offset - subsections 360-15(1) and (3): As the tax incentives are available to all types of investors other than 'widely held companies' (as defined in section 995-1) and 100 per cent subsidiaries, Trust A satisfies paragraphs 360-15(1) and (3) as it would be entitled to a tax offset if the trust were an individual, provided that it satisfies the criteria under paragraphs 360-15(1)(b) to (f) and the requirements under section 360-20. | Detailed Reasoning - Issued with equity interests which are shares in the company - paragraph 360-15(1)(b): Trust A was issued with equity interests that were shares in Company B during the year ended 30 June YYYY. Therefore, it satisfies subparagraph 360-15(1)(b). | Detailed Reasoning - Subsection 360-40(1) applies to the ESIC- paragraph 360-15(1)(c): Trust A has been provided with advice that Company B has met the criteria of an ESIC for the year ending 30 June YYYY. Therefore, paragraph 360-15(1)(c) is satisfied. | Detailed Reasoning - Trust A and Company B must not be affiliates of each other - paragraph 360-15(1)(d), and subsections 328-130(1) and 328-130(2).: Trust A invested in Company B and has submitted that the Trust did not have any degree of influence over the business affairs of Company B. The applicant states that Trust A is merely a passive investor in Company B. | Detailed Reasoning - Neither the company nor the individual is an affiliate: The meaning of affiliate is set out in section 328-130.Under subsection 360-130(1) an individual or company is an affiliate of an entity where that individual or company acts, or could reasonably be expected to act: a) in accordance with the entity's directions or wishes in relation to the affairs of that individual or company's business; or b) in concert with the entity in relation to the affairs of the individual or company's business. 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. 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: i. family or close personal relationships; ii. financial relationships or dependencies; iii. relationships created through links such as common directors, partners, or shareholders; iv. the degree to which the entities consult with each other on business matters; or v. 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. In examining the above factors, there is no evidence to suggest that Company B would act, or reasonably be expected to act, in accordance with Trust A's directions or wishes, or in concert with the investor, in relation to the affairs of the business of Company B. Therefore, Company B is not an affiliate of Trust A and paragraph 360-15(1)(d) is satisfied. | Detailed Reasoning - Employee share scheme - paragraph 360-15(1)(e): The shares issued to Trust A were not issued under an employee share scheme. Therefore, paragraph 360-15(1)(e) is satisfied. | Detailed Reasoning - 30 per cent equity interest restriction - paragraph 360-15(1)(f): To qualify for the tax offset, the investor entity must not hold more than 30 per cent of the equity interests of an ESIC, including any entities 'connected with' (section 328-125) the ESIC, tested immediately after the time relevant equity interests are issued. Trust A has stated that it did not hold more than 30% of the equity interests in Company C ('the ESIC') immediately after the issue of its shares in Company C on DD Month YYYY that carried any of the rights under subparagraphs 360-15(1)(f)(i), (ii) or (iii). Therefore, Trust A satisfies paragraph 360-15(f). | Detailed Reasoning - Limited entitlement for certain kinds of investors - Section 360-20(1)(a) and (b): Restrictions apply to the amount and entitlement of the offset as provided in paragraphs 360(20)(1) and (b) which relate to a type of investor. • Under the Corporations Act 2001 , 'sophisticated investors' who meet certain requirements don't have to be provided with a disclosure document, such as a prospectus or product disclosure statement, when being offered shares in a company. Our document entitled Tax incentives for early stage investors , available on our website ato.gov.au using quick code QC 48899 includes examples of when an entity may be a sophisticated investor. This includes an example where: • An entity (including a trust) 'have paid at least $500,000 for the qualifying shares (either as a single offer or including any amounts you have previously paid for the same class that you hold in the same company)'. Trust A is considered to be a 'sophisticated investor' for the purposes of the Corporations Act 2001, and therefore paragraph 360-20(1)(a) does not apply. Notwithstanding Trust A has advised that their investment was greater than $50,000 in the year ending 30 June YYYY, they qualify as a sophisticated investor and therefore paragraph 360-20(1)(b) does not preclude them from satisfying paragraph 360-15(1)(b) due to the operation of subsection 360-20(1). Therefore, the limitations under section 360-20 on the amount paid for shares will not apply in relation to the Trust's issue of shares in Company B for the year ending 30 June YYYY. | Detailed Reasoning - Conclusion on subsections 360-15(1) and 360-15(3): Trust A is entitled to a tax offset under section 360-15 of the ITAA 1997 for the year ending 30 June YYYY. | Detailed Reasoning - Question 2: Are the members of Trust A entitled to a tax offset in accordance with section 360-30 in respect of Trust A's acquisition of shares in a qualifying ESIC? | Summary: The members of the Trust A are entitled to a tax offset in accordance with 360-30. | Detailed Reasoning - Detailed Reasoning: As discussed in Question 1, A member of a trust or partnership, being a beneficiary or unit holder of a trust, or a partner in a partnership (section 960-130) at the end of an income year is entitled to a carry-forward tax offset for that income year, provided that if the trust or partnership were an individual it would be entitled to a tax offset. Trust A is entitled to a tax offset in under section 360-15 for the year ending 30 June 20XX, therefore, the members of the trust are entitled to a tax offset for that income year. Subsection 360-30(1) calculates the amount of tax offset that can be claimed by a member of a trust as the member's share of the tax offset multiplied by the amount referred to as the notional tax offset amount. The notional tax offset amount is defined to be the amount of the trust's tax offset calculated under section 360-25 as if the entity had been an individual i.e. 20% of the amount paid for the shares issued to Trust A. On DD MM 20YY, Company B issued shares to Trust A at $X.00 each. The notional tax offset is equal to 20% of the amount paid for the share issued, which is equal to $XX,XXX. | Detailed Reasoning - Question 3: Does the issuing of those shares give rise to an entitlement to modified CGT treatment pursuant to section 360-50 of the ITAA 1997? | Summary: Section 360-50 applies to the shares issued by Company B to the Trust on DD MM YYYY. | Detailed Reasoning - Detailed reasoning:: As discussed in Question 1, section 360-50 outlines the modified capital gain tax treatment of shares acquired in a qualifying ESIC. Trust A is entitled to a tax offset under section 360-15 of the ITAA 1997 for the shares issued by Company B on DD YY MMMM, therefore, section 360-50 applies to those shares.

Is the A Trust entitled to a tax offset under section 360-15 of the Income Tax Assessment Act 1997 (ITAA 1997) for the year ending 30 June YYYY? | Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.