Private ruling: Early stage innovation tax offset
Date of advice: 20 September 2018
Published: November 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: In respect of the shares issued by Company Z on Date X, if Trust A had been an individual, would they be entitled to the tax offset under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: 1. Person X is the sole director and secretary of Company A which is the trustee of Trust A. 2. Trust A was issued shares in Company Z on Date X. 3. On Date X Company Z met the requirements of an Early Stage Innovation Company (ESIC) under subsection 360-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997). 4. On Date X Trust A’s shareholding in Company Z was less than 30%. 5. Details of how Person X, Company A, Trust A and Company Z interacted were provided with the private ruling application.

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: Summary: All legislative references are to the ITAA 1997 unless otherwise indicated. Subsection 360-15(1) would have applied to Trust A if they had been an individual. Therefore either the trustee under subsection 360-15(3) or the members of the trust under subsection 360-15(2) will be entitled to the early stage investors offset. | Detailed Reasoning - Members of partnership or trust –entitlement to offset: 1. Subsection 360-15(2) states that a member of a trust is entitled to a tax offset for an income year if the trust would be entitled to a tax offset, under subsection 360-15 (1), for the income year, if the trust were an individual. | Detailed Reasoning - Trustees- entitlement to offset: 2. Subsection 360-15(3) applies in situations where 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. 3. If the trustee is liable to pay tax under one of the above provisions then the trustee is entitled to a tax offset for an income year if the trust would be entitled to a tax offset, under subsection 360-15 (1), for the income year, if the trust were an individual. | Detailed Reasoning - Individual’s entitlement to offset -360-15(1): 4. 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 - Conclusion -background: 5. Trust A itself is not entitled to the offset. It will be either the trustee (if the trustee is liable to pay tax) or the members of the trust that are entitled to an offset. 6. The trustee or the members of the trust will only be entitled to the offset if Trust A was an individual and passes the tests under 360-15(1). | Detailed Reasoning - Company issues shares that are equity interests: 7. The shares issued to Trust A represent an equity interest in Company Z. | Detailed Reasoning - Subsection 360-40(1) applies to the Company: 8. Company Z was an ESIC immediately after the shares were issued. | Detailed Reasoning - Neither the company nor the individual is an affiliate: 9. 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. 10. 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. 11. 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. 12. In normal circumstance a trust and not a company or individual, it cannot be an affiliate of Company Z. However in examining 360-15(1) we are treating Trust A as if it was an individual so for this subsection only we have to be satisfied that Company Z is not an affiliate of Trust A. 15. In examining these factors there is no evidence that leads to a conclusion that Company A is acting or could reasonably be expected to act in accordance with the direction and wishes of Trust A. 16. Therefore Company Z is not an affiliate of Trust A. | Detailed Reasoning - Acquired under an employee share scheme: 17. There is only one employee of Company Z and that employee is not an associate of Trust 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: 18. Trust A’s interest in Company Z is less than 30%. | Detailed Reasoning - Conclusion 360-15(1): 19. Had Trust A been an individual it would have been entitled to the offset under subsection 360-15(1).