Private ruling: ESIC tax offset
Date of advice: 1 December 2025
Published: 27 January 2026
Ruling period: Year ended 30 June 20XX
Date scheme commenced: XX XXX 20XX

Ruling: Q1: For the purposes of subsection 360-15(2) of the Income Tax Assessment Act 1997 (ITAA 1997), is the testing in paragraphs 360-15(1)(b), 360-15(1)(d) and 360-15(1)(f) of the ITAA 1997 satisfied in the 20XX income year such that the 'amount' contemplated by paragraph 360-25(1)(a) of the ITAA 1997 is the $X paid for the equity interest in the ESIC by X Family Trust? | A1: Yes.

Relevant facts and circumstances: X Family Trust was settled in 20XX. X Investments Pty Ltd was registered in 20XX and acts as the trustee of X Family Trust. Person X is the sole director and shareholder (beneficially holding one fully paid ordinary share) of X Investments Pty Ltd. The Trust is an original investor in an ESIC which was established in XXX 20XX to develop new AI software. The other initial X shareholders in the ESIC were family trusts (Trust B and Trust C) controlled by related family members. Trust B was controlled by Child 2 and Trust C was controlled by Child 1 of the appointor of X Family Trust (i.e. their parent). Each family trust initially held one third interest in the ESIC and the two children and their parent were collectively known as the Founders of the ESIC. The current directors of the ESIC include the spouse of the appointor of X Family Trust (Director 1), both children of Director 1 and two independent directors who have invested in the ESIC. In XXX 20XX, X Family Trust applied for and received additional ordinary shares in the ESIC to the value of $X. Following the issue of further shares to the trustee company of X Family Trust (X Investments Pty Ltd) on XX XXX 20XX, the three family trusts (X Family Trust, Trust B and Trust C) held approximately XX% of the voting shares of the company, as shares has been issued to other external investors which had diluted their original shareholdings. The trustee of X Family Trust (X Investments Pty Ltd) held approximately XX% of voting power in the ESIC following the issue of new shares. The directors of the ESIC hold regular meetings to discuss the business affairs and plans for the company, which are usually attended by all directors including the three Founders of the ESIC. The appointor/controller of the respective family trusts are as follows: • X Family Trust: Person X being the spouse of Director 1 of the ESIC. Trustee is X Investments Pty Ltd. • Trust B: Child 2 being one of the Founders and Director 2 of the ESIC. Trustee of Trust B is Child 2. • Trust C: Child 1 being one of the Founders and Director 3 of the ESIC. Trustee of Trust C is the spouse of Child 1. Person X is the spouse of Director 1 of the ESIC but is not involved in the management of the ESIC. The distributions of income resolved by the trustee of X Family Trust for the years ended 20XX, 20XX and 20XX have been 100% of trust income to Person X for each of those years. No distributions of income have been made by Trust B and Trust C, as no income has been derived by either trust for years ended XX XXX 20XX and 20XX. The nominated beneficiaries of Trust B and Trust C are: • Trust B: Child 2 and 50% their spouse. • Trust C: 100% spouse of Child 1. A copy of the trust deed for X Family Trust, the latest ASIC company report and the constitution of X Investments Pty Ltd have been provided.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 360-15 | Income Tax Assessment Act 1997 section 360-25 | Income Tax Assessment Act 1997 section 360-30 | Income Tax Assessment Act 1997 subsection 328-130(1) | Income Tax Assessment Act 1997 subsection 328-130(2) | Income Tax Assessment Act 1997 subsection 360-15(1) | Income Tax Assessment Act 1997 subsection 360-15(2) | Income Tax Assessment Act 1997 subsection 360-15(3) | Income Tax Assessment Act 1997 subsection 328-125(1) | Corporations Act 2001 section 708

Reasons for decision: Summary: All references are to the Income Tax Assessment Act 1997 (ITAA 1997), unless otherwise noted. The requirements in subsection 360-15(1) have been met. Therefore, a tax offset is available under subsection 360-15(2) for the year ended 30 June 20XX. For the purposes of section 360-30, XX% of the $XX,XXX paid for the equity interest in the ESIC by the X Family Trust on XX XXX 20XX is the 'notional tax offset amount' for the purposes of the formula in that section. That is, the amount contemplated by paragraph 360-25(1)(a) is the $XX,XXX paid for the equity interest in the ESIC. | Detailed Reasoning - Subdivision 360-A Tax incentives for early stage investors in innovation companies: Division 360 outlines the criteria for an investor purchasing new shares in a qualifying Early Stage Innovation Company (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; and • 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 - Section 360-15 Entitlement to the tax offset: 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 ESVCLPs, 'widely held companies' (as defined in section 995-1) and 100% subsidiaries of these companies provided certain conditions are met and restrictions do not apply. | Detailed Reasoning - Sophisticated Investors - subsections 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. | 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 - Subsection 360-15(2) Members of trusts or partnerships: 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 under subsection 360-15(2) provided that if the trust or partnership were an individual it would be entitled to a tax offset. | Detailed Reasoning - Section 360-30 Amount of the tax offset - members of trusts or partnerships: The amount of the tax offset for a member of a trust or partnership is determined by the formula in section 360-30 which for the purposes of one of the inputs to that formula refers to section 360-25 and what would have been the amount of the tax offset had the partnership or trust been an individual. | Detailed Reasoning - Section 328-130 The investor and the ESIC must not be affiliates of each other: 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. 'Affiliate' is defined in subsection 328-130(1) as an individual or company that acts, or could reasonably be expected to act, in accordance with the entity's directions or wishes, or in concert with the entity, in relation to the business affairs of that individual or company. Trusts are not capable of being affiliates. However, a trustee (who is an individual or company) may be an affiliate of an entity. That is, an investor will be an affiliate of the company if the company acts, or could 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 company. Likewise, the company will be an affiliate of the investor if the investor acts, or could reasonably be expected to act, in accordance with the company's directions or wishes, or in concert with the investor, in relation to the affairs of the business of the investor. This restriction is intended to target the incentives to new investors in an ESIC. It is designed to encourage new investment in ESICs rather than merely subsidise the existing investment. It is also an integrity rule to prevent entities acting in concert to obtain the benefit of the tax offset, where the investment is not for an innovation purpose or does not represent new capital for the ESIC that meets the policy objectives of this measure. For instance, a wholly owned subsidiary company of an ESIC would not qualify for the offset. An investment in these circumstances would essentially represent shifting capital between two legal entities that does not represent new investment (see the Explanatory Memorandum to the Taxation Laws Amendment (Tax Incentives for Innovation) Bill 2016, at paras 1.34 to 1.36). 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. This means determining whether an investor is an affiliate of the company (or vice versa) requires more than simply examining the nature of the business relationship and is focused on the substance of whether one is acting in accordance with the directions, wishes, or in concert with the other. The Explanatory Memorandum to the Tax Laws Amendment (Small Business) Act 2007 at para 2.36, lists a number of factors that may be relevant in determining 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: a. family or close personal relationships, b. financial relationships or dependencies, c. relationships created through links such as common directors, partners, or shareholders, d. the degree to which the entities consult with each other on business matters; or e. 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. However, none of these are factors are determinative in their own right. Further, at para 2.37: A spouse or a child under the age of 18 is not automatically an affiliate. | Detailed Reasoning - Section 328-125 30% equity interest restriction: To qualify for the tax offset, the investor entity must not hold more than 30% of the equity interests of an ESIC, including any entities 'connected with' the ESIC, tested immediately after the time relevant equity interests are issued, that carry the right to: (i.) receive more than 30% of any distribution of income by the company or the entity; or (ii.) receive more than 30% of any distribution of capital by the company or the entity; or (iii.) exercise, or control the exercise of, more than 30% of the total voting power in the company or the entity. Broadly, an ESIC is 'connected with' another entity if the ESIC controls the other entity (or vice versa) or both are controlled by the same third entity. | Detailed Reasoning - Entitlement to the tax offset - section 360-15: The tax incentives are available to all types of investors other than: • an ESVCLP, • 'widely held companies' (as defined in section 995-1), or • a 100 % subsidiary of a widely held company. The beneficiaries of X Family Trust will satisfy subsection 360-15(2) and be entitled to the tax offset provided that were X Family Trust an individual it would satisfy 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): X Family Trust was issued with equity interests that were ordinary shares to the value of $X in the ESIC on XX XXX 20XX. Therefore, it satisfies paragraph 360-15(1)(b). | Detailed Reasoning - Subsection 360-40(1) applies to the ESIC - paragraph 360-15(1)(c): X Family Trust has advised that the company it acquired the shares in is an ESIC and meets the requirements of subsection 360-40(1) immediately after it acquired the shares. Therefore, paragraph 360-15(1)(c) is satisfied. | Detailed Reasoning - X Family Trust and the ESIC must not be affiliates of each other - paragraph 360-15(1)(d) and subsections 328-130(1) and 328-130(2): The investor (X Investments Pty Ltd ATF X Family Trust) will be an affiliate of the ESIC if the ESIC acts, or could reasonably be expected to act, in accordance with the X Investments Pty Ltd's directions or wishes, or in concert with the X Investments Pty Ltd, in relation to the affairs of the business of the ESIC. Likewise, the ESIC will be an affiliate of X Investments Pty Ltd if X Investments Pty Ltd acts, or could reasonably be expected to act, in accordance with the ESIC's directions or wishes, or in concert with X Investments Pty Ltd, in relation to the affairs of the business of X Investments Pty Ltd. X Family Trust (an original shareholder in the ESIC) further invested in the ESIC in XXX 20XX and has submitted that as Person X is not involved in the management of, nor control of the ESIC, then the Trustee of X Family Trust (X Investments Pty Ltd) and the ESIC are not affiliates at that time. It is noted Person X is the appointor and sole guardian of the X Family Trust. They are also the sole director of X Family Trust's trustee, X Investments Pty Ltd, and the spouse of Director 1, and the parent of Director 2 and Director 3 of the ESIC. There are also two independent directors who have invested in the ESIC. In examining the relevant factors from the Explanatory Memorandum to the Tax Laws Amendment (Small Business) Act 2007 (at para 2.36) described above, it is noted that: • whilst there are family relationships, the ESIC has five directors - Person X's spouse, two children and two independent directors, • although Person X's spouse is a controlling mind of the ESIC, a spouse (or child) is not without more an affiliate, • there are no financial relationships or dependencies between the ESIC and X Investments Pty Ltd, • there are no common directors between the ESIC and X Investments Pty Ltd, • Person X (sole director of X Investments Pty Ltd) is not involved in the management of nor control of the ESIC, and • there are no obligations between the two companies to purchase goods or services or conduct business together. The meaning of 'acting in concert' was considered by the Federal Court in Papua New Guinea Dockyard Ltd v Adams [2005] FCA 413. Finkelstein J held at [13] that: These cases show that a person, A, will be acting in concert with another person, B, if A engages in conduct (act or omission) in consequence of an agreement or understanding between A and B and the conduct is in pursuance of an objective or purpose which is common to both ... When the Commissioner considers whether the trustee and the ESIC have a commonality of purposes with respect to their conduct, it is noted that the Trustee has engaged in only one act which is the subscription for the shares in the ESIC. Further, the Trustee is constrained by the Trust Deed in terms of how they may act and deal with the trust fund. That is, they have to act for the benefit of the trust objects and not for the purposes of the ESIC. There is no evidence to suggest that the ESIC would act, or reasonably be expected to act, in accordance with X Investments Pty Ltd's directions or wishes, or in concert with the investor, in relation to the affairs of the business of the ESIC. Nor vice versa. Therefore, X Family Trust satisfies subsections 328-130(1) and 328-130(2), and would satisfy paragraph 360-15(1)(d) if it were an individual. | Detailed Reasoning - Employee share scheme - paragraph 360-15(1)(e): The shares issued to X Family Trust were not issued under an employee share scheme. Therefore, paragraph 360-15(1)(e) is satisfied. | Detailed Reasoning - 30% equity interest restriction - paragraph 360-15(1)(f): To qualify for the tax offset, the investor entity must not hold more than 30% 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. The trustee company of X Family Trust (X Investments Pty Ltd) does not fail the condition set out in paragraph 360-15(1)(f) as its equity interest in the ESIC immediately following the issue of additional shares is less than 30%. Further, the trustee company for X Family Trust (X Investments Pty Ltd) does not exercise or control the exercise of more than 30% of the voting power of the ESIC (subparagraph 360-15(1)(f)(iii)). Although X Family Trust initially held XX.X% of the equity in the ESIC, immediately after the issue of the shares on XX XXX 20XX, it held XX.X% of the shares in the ESIC due to further share issues to unrelated investors in the meantime. This would satisfy the first requirement of paragraph 360-15(1)(f), but the Commissioner must also be satisfied that X Family Trust did not hold equity interests in an entity connected with the company that carry the right to: (i.) receive more than 30% of any distribution of income by the company or the entity; or (ii.) receive more than 30% of any distribution of capital by the company or the entity; or (iii.) exercise, or control the exercise of, more than 30% of the total voting power in the company or the entity. Subsection 328-125(1) says an entity is connected with another entity if: (a) one of the entities "controls" the other entity; or (b) if the two entities are 'controlled' by the same third entity, in which case all three entities will be connected. The appointor/controller of the respective family trusts are as follows: • X Family Trust: Person X being the spouse of Director 1 of the ESIC. Trustee is X Investments Pty Ltd. • Trust B: Child 2 being one of the Founders and Directors 2 of the ESIC, Trustee of Trust B is Child 2. • Trust C: Child 1 being one of the Founders and Director 3 of the ESIC. Trustee of Trust C is the spouse of Child 1. The three family trusts (X Family Trust, Trust B and Trust C) have separate trustees, appointors and controllers and none of the trusts have distributed income to the other family trusts in the past. Therefore, X Family Trust satisfies paragraph 360-15(1)(f) as it neither holds more than 30% of the interests in the ESIC, nor does it hold equity interests in any of the other parties who hold shares in the ESIC immediately after the issue of the shares on XX XXX 20XX. | Detailed Reasoning - Limited entitlement for certain kinds of investors - section 360-20: On the facts provided, section 360-20 does not apply. | Detailed Reasoning - Conclusion: The requirements in subsection 360-15(1) have been met. Therefore, a tax offset is available under subsection 360-15(2) for the year ended 30 June 20XX. For the purposes of section 360-30, XX% of the $XX,XXX paid for the equity interest in the ESIC by the X Family Trust on XX XXX 20XX is the 'notional tax offset amount' for the purposes of the formula in that section. That is, the amount contemplated by paragraph 360-25(1)(a) is the $20,000 paid for the equity interest in the ESIC.