Private ruling: Entitlement to the early stage investors offset
Date of advice: 17 May 2018
Published: July 2018
Ruling period: Year ending 30 June 201X
Date scheme commenced: 1 July 201X

Ruling: Q1: In respect of the shares issued by Company A, does Trust A meet the eligibility criteria for Tax incentives for early stage investors in qualifying innovation company under Subdivision 360-A of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: 1. On Date X Trust A purchased ordinary shares in Company A. 2. Prior to this date Trust A had no interest in Company A and there was only one shareholder of Company A. This was company founder. Once they acquired the shares Trust A’s equity interest in Company A equalled 25%. 3. In addition on Date X the founder of Company A (who was also sole director) resolved to add David three additional directors. This included a beneficiary of Trust A. 4. Company A has received a private ruling in which the Commissioner ruled that Company A was an Early Stage Innovation Company (ESIC) under section 360-40 on Date X. Information provided 5. You have provided information in a number of documents in relation to the share issue, including: a. your private ruling application; b. a copy of Company A’s board resolution approving sale of shares and appointment of new directors dated 6 July 201X; and c. a copy of Company A’s constitution 6. We have referred to the relevant information within these documents in applying the relevant tests to your circumstances.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 360-A | Income Tax Assessment Act 1997 section 360-15 | 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 section 360-30 | Income Tax Assessment Act 1997 section 328-130 | Income Tax Assessment Act 1936 section 98 | Income Tax Assessment Act 1936 section 99 | Income Tax Assessment Act 1936 section 99A

Reasons for decision: Summary: All legislative references are to the ITAA 1997 unless otherwise indicated. For the shares issued by Company A either, the trustee of Trust A, if subsection 360-15(3) applies or the members of the Trust A, if subsection 360-15(2) applies, will be entitled to the early stage tax offset, under subdivision 360-A. | Detailed Reasoning - Background offset for members of partnership or trust and trustee of a trust: 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 (1), for the income year if the trust were an individual. 2. Once the entitlement is determined, the amount a member can claim is determined under section 360-30. If the member is entitled to a fixed proportion of any capital gain from a disposal the percentage of offset that can claim is based is based on that fixed proportion. Otherwise the trustee of the trust must provide the member with a written determination that will allow the member to determine the amount of offset they are entitled to. 3. A trustee of a trust is entitled to a tax offset under subsection 360-15(3) if the trustee would be entitled to a tax offset under subsection (1) if the trustee were an individual. However for subsection 360-15(3) to apply, the trustee must be liable to be assessed (or has been assessed), and is liable to pay tax, on a share of 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. 4. Regardless of whether subsection 360-15(2) or subsection 360-50(3) applies we need to treat the trust (or the trustee) as if it was an individual and determine if subsection 360-15(1) applies to the trust (or the trustee). | Detailed Reasoning - Subsection 360-15(1): 3. Under subsection 360-15(1) an individual is entitled to the offset if: ● at a particular time during the income year, a company issues them with equity interests that are shares in the company; ● the company was an ESIC immediately after that time; ● neither the individual nor the company is an *affiliate of each other at that time; ● the issue of those shares is not an acquisition of an ESS interests under an employee share scheme; and ● immediately after that time the individual did not hold more than 30% of the equity interests in the company or in an entity *connected with the company. 4. In this case, the Trust A was issued ordinary shares which would be an equity interest, Company A was an ESIC, the shares were not issued under an employee share scheme and the equity interest held after Date X was 25%. 5. Therefore the only points that need further examination is whether the Trust A and Company A were affiliates when the shares were issued. 6. 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: 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. 7. 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. 8. 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: 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 9. In this case, prior to the shares being issued on Date X Company A was effectively controlled by its sole shareholder and sole director. It was only after the resolution made to issue shares to other parties and accept three new directors that the Trust A established a relationship between itself and Spaceship 10. Therefore on the test date neither Trust A nor Company A were affiliates of each other. | Detailed Reasoning - Conclusion: 5. The trustee or the members of the Trust A, depending on whether subsection 36015(2) or (3) applies to the Trust A are entitled to a tax offset fin relation to the shares issued to Trust A by Company A on Date X.