Private ruling: Early stage innovation company
Date of advice: 3 December 2021
Published: August 2022
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you and The Company Pty Ltd (The Company) affiliates of each other pursuant to section 328-130 and section 360- 15(1)(d) of the Income Tax Assessment Act 1997 ('ITAA 1997')? | A1: No. | Q2: If the answer to question 1 is no, are you entitled to a tax offset in respect of the shares issued by The Company in June 2021, pursuant to subsection 360-15(2) of the ITAA 1997 for the period 1 July 2020 to 30 June 2021? | A2: Yes.

Relevant facts and circumstances: 1. You are a director and shareholder of the Company. 2. The Company has received a private ruling stating that for the years ended 30 June 20XX and 30 June 20XX it meets the criteria of an Early Stage Innovation Company (ESIC) under subsection 360-40(1) of the ITAA 1997. 3. The Company has provided you with relevant information, including that it has received a Private Ruling stating that it meets the criteria of the ESIC tests under subsection 360-40(1) for the year ending 30 June 20XX. 4. The Company has authorised the ATO to use the information previously provided by the Company in respect of the Company's ESIC application in making this ruling in respect of your eligibility for the offset under section 360-15. 5. The Company has two unrelated shareholders; you and Company X. 6. On X date, you became one of two founding members of the Company, with an initial investment of XX ordinary shares (XX%). Company X was the other founding member, with an initial investment of XX ordinary shares (XX%) 7. On Y Date, you and Company X each purchased additional Company shares. Company X purchased XX shares, increasing its holding to XX%, and you purchased XX shares, thereby reducing your holding to XX% of the equity interest in the Company 8. ASIC records show that all Company shares issued to you and Company X are ordinary shares. 9. According to the Company's Constitution: a) The shares issued in The Company entitle the holder to receive notice of meetings and shall confer upon the holder a right to cast one vote for each share held at any general meeting of the Company, either in person, by proxy, or by attorney, and shall rank equally with all other shares in any capital surplus upon a reduction of capital or winding up. b) At general meetings of Members for voting rights on a show of hands, each Member present has one vote. c) At general meetings of Members for voting rights on a poll, each member present: i. has one vote for each fully paid share held; and ii. for each other share held has a fraction of a vote equivalent to the proportion which the amount paid (not credited) bears to the total amounts paid and payable (excluding amounts credited) for the share. When calculating this proportion, amounts paid in advance of a call are to be ignored. 10. The Company has three Directors; Mr X, Mr Y and you. Mr X and Mr Y are also Directors of Company X. 11. According to The Company's Constitution: a) Questions arising at any Board meeting must be decided by a majority of votes. b) The Board may elect from among their number a Chairman and Deputy Chairman of their meetings and determine the period for which each is to hold office. If no Chairman or Deputy Chairman is elected or if at any meeting the Chairman and the Deputy Chairman are not present at the time specified for holding the meeting, the Directors present may choose one of their number to be Chairman of the meeting. c) In the case of an equality of votes, the Chairman of the meeting has a second or casting vote, but the Chairman has no casting vote where only two Directors are present or competent to vote on the question. Information provided 1. You have provided information in a number of documents and phone conversations in relation to 'The Investment', including: a) your private ruling application dated X Date. b) supplementary information provided on Y Date and Z Date. 2. We have referred to the relevant information within these documents and conversations in applying the relevant tests to your circumstances.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 328-130 | Income Tax Assessment Act 1997 Section 360-15(1)(d) | Income Tax Assessment Act 1997 Section 360-15(1)(b) | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: You are not considered an affiliate of the Company pursuant to subdivision 360-Afor the year ending 30 June 20XX. | Detailed Reasoning - Detailed reasoning: 1. Paragraph 360-15(1)(d) states that you are entitled to a tax offset for an income year if neither you nor the company is an affiliate of each other at that time. 2. Section 995-1 of the ITAA 1997 defines the term 'affiliate' as having: "the meaning given by section 328-130." 3. Subsection 328-130(1) defines the term 'affiliate' as: "An individual or a company is an affiliate of yours if the individual or company acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the individual or company." 4. Subsection 328-130(2) further outlines: "However, an individual or a company is not your affiliate merely because of the nature of the business relationship you and the individual or company share." 5. 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. 6. There is no evidence that the Company is acting or could reasonably be expected to act in accordance with the direction and wishes of you. You have a XX% shareholding and are one of three directors on the board of the Company. Company X is the majority shareholder, holding XX% of the shares and has two directors on the board of the Company. 7. You and the Company do not have a financial relationship beyond your role as shareholder in the Company and remuneration for your services as director and are not financially dependent on each other. 8. Whilst you have been a Director of the Company since X date, this activity does not necessarily meet the definition of affiliate. 9. Support for this view is obtained from Re Taxpayer and FC of T [2010] AATA 455 at paragraph 52, where Deputy President Hack stated: The Commissioner accepts that holding the office of director is not sufficient to give rise to the inference that the director acts at the direction of the company or in concert with it. The concession is hardly novel; the reality is that the company acts at the direction of its directors. 10. Deputy President Hack made clear that directors doing their normal roles in managing and running a company's business and conducting its day-to-day operations is not by itself sufficient to deem a director to be an affiliate of a company. 11. In examining these factors, there is no indication that the Company would act, or reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, in relation to the affairs of the business of the Company and vice versa. 12. Therefore, you and the Company satisfy subsections 328-130(1) and 328-130(2) and paragraphs 360-15(1)(b) and 360-15(1)(d) and thus you and the Company and are not affiliates of each other in the year ending 30 June 20XX. | Summary: You are entitled to a tax offset in respect of shares issued by the Company on 30 June 20XX pursuant to Subdivision 360-A for the year ending 30 June 20XX. | Detailed Reasoning - Detailed reasoning: 1. If you invest in a qualifying ESIC, you may be eligible for the early stage investor tax incentives. The tax incentives for early stage investors are contained in Subdivision 360-A. 2. The early stage investor tax offset is available, in the general case, if all of the following conditions in subsection 360-15(1) are satisfied: You are entitled to a *tax offset for an income year if: (a) you are none of the following: (i) a trust or a partnership; (ia) an ESVCLP; (ii) a *widely held company or a *100% subsidiary of a widely held company; and (b) at a particular time during the income year, a company issues you with *equity interests that are *shares in the company; and (c) subsection 360-40(1) (about early stage innovation companies) applies to the company immediately after that time; and (d) neither you nor the company is an *affiliate of each other at that time; and (e) the issue of those shares is not an *acquisition of *ESS interests under an *employee share scheme; and (f) immediately after the issue of those shares, you do not hold equity interests in the company, or 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. 3. As you are an individual, paragraph 360-15(1)(a) is satisfied. 4. The Company issued you with equity interests that were shares in the Company on 30 June 2021, therefore paragraph 360-15(1)(b) is satisfied 5. The Company was an ESIC under subsection 360-40(1) immediately after it issued those shares to you, therefore paragraph 360-15(1)(c) was satisfied. 6. You and the Company were not affiliates at the time those shares were issued, therefore paragraph 360-15(1)(d) is satisfied. 7. The issue of the shares to you were not an acquisition of ESS interests under an employee share scheme, therefore paragraph 360-15(1)(e) is satisfied. 8. Immediately after the shares were issued, you did not hold more than 30% of the equity interests in the Company or 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 (ii) receive more than 30% of any distribution of capital by the Company; or (iii) exercise, or control the exercise of, more than 30% of the total voting power in the Company. 9. Therefore, you satisfy paragraph 360-15(1) for the year ending 30 June 20XX and are entitled to the tax offset in respect of shares issued by the Company on X Date.

Reasons for decision: All legislative references are to the Income Tax Assessment Act 1997 unless otherwise indicated.