Private ruling: Early stage innovation company offset
Date of advice: 8 April 2021
Published: June 2021
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: For the year ended 30 June 20XX, is the amount of Early Stage Innovation Company ('ESIC') offset for the taxpayer under subsection 360-25(1) of the Income Tax Assessment Act 1997 equal to 20% of the full subscription amount? | A1: Yes

Relevant facts and circumstances: The Company was incorporated in Australia on xx xx 20XX. The Company met the criteria of an ESIC under subsection 360-40(1) of the ITAA 1997 for the year ended 30 June 20XX pursuant to a previous Private Binding Ruling. The Company's equity interest is not listed for quotation in the official list of any stock exchange. On xx xx 20XX, investors each subscribed for a payment plan in the Company. The Company calls payments according to the Subscription Agreement.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 360-A | Income Tax Assessment Act 1997 section 360-15 | Income Tax Assessment Act 1997 section 360-40 | Income Tax Assessment Act 1997 section 360-45 Detailed Reasoning | 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. | The investor must also satisfy section 360-20 to satisfy subsection 360-15(1). | Section 360-20 operates to remove an investor's entitlement to a tax offset under section 360-15 if both the requirements in subsection 360-20(1) are met. Subsection 360-20(1) is met if: | (a) for each offer resulting in equity interests that are shares in the company being issued to the | investor during the income year, none of subsections 708(8), (10) or (11) of the Corporations Act 2001 removed the need for a disclosure document; and | (b) a total of more than $50,000 was paid for the issue to you of the shares resulting from all of those offers. | Subsection 360-25(1) outlines that the amount of tax offset is 20 per cent of the sum of any money and non-cash benefits received or entitled to be received by the company in return for the issue to the shareholder of the shares. Subsection 360-25(1) states: | If subsection 360-15(1) applies, the amount of your *tax offset is 20% of the sum of the following: | a) an amount equal to any money received, or entitled to be received, by the company referred to in paragraph 360-15(1)(b) for the issue to you of the *shares as described in that paragraph; | b) an amount equal to the *market value of any *non-cash benefit received, or entitled to be received, by the company referred to in paragraph 360-15(1)(b) for the issue to you of the shares as described in that paragraph, as at the time the shares were issued to you. | The meaning of 'entitled to received' has been considered in both ATO ID 2004/568 Research and Development: clawback - when has a company received, or become entitled to receive, a grant or recoupment (ATO ID 2004/58) and ATO ID 2015/5 Income tax: Research and Development: Disposal of research & development result and future payments .(ATO ID 2015/5). | ATO ID 2004/568 states: | The ordinary meaning of 'becoming entitled to receive an amount' is that there is an absolute or unconditional entitlement to receive the amount. Part of the entry for 'entitle' in the The Macquarie Dictionary , 2001 rev. 3rd edn, The Macquarie Library Pty Ltd, NSW is: | ... furnish with grounds for laying claim. | Similarly, part of the entry for 'entitle' in Black's Law Dictionary , Black, HC, 1991, Abridged 6th edn, West Pub. Co, St Paul: | ...To qualify for, to furnish with proper grounds for seeking or claiming | ATO ID 2015/5 also considers the term 'entitled to received' and it refers to ATO ID 2004/568, it states: | This view is supported by ATO ID 2004/568 which considers, among other things, when a taxpayer becomes entitled to receive a Government grant or recoupment in the R&D context. The ATO ID relevantly states: | The ordinary meaning of 'becoming entitled to receive an amount' is that there is an absolute or unconditional entitlement to receive the amount... | ATO ID 2004/568 goes on to consider the ordinary dictionary meaning of 'entitle', noting that it means 'to qualify for, to furnish with proper grounds for seeking or claiming'. | Consistent with the above interpretation of the term 'entitled to receive', the taxpayer, as licensor, becomes entitled to the Development Milestone Payments upon the licensee (overseas related entity) achieving each Development Milestone as specified in the licence agreement. | Application to your circumstances | The requirements in paragraph 360-15(1)(c), subsection 360-40(1) about early stage innovation companies must apply to the company immediately after the issue of shares described in paragraph 360-15(1)(b). | An individual or company is an affiliate of an entity where that individual or company acts, or could reasonably be expected to act: | I. in accordance with the entity's directions or wishes in relation to the affairs of that individual or company's business; or | II. 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. | To meet the requirements in paragraph 360-15(1)(e) the issue of the shares must not be an acquisition of ESS interest under an employee share scheme. | To meet the requirements in paragraph 360-15(1)(f) immediately after the issue of shares no one seed preference shareholder must hold equity in the Company or an entity connected with the Company that carry the right to: | I. receive more than 30% of any income distribution by the Company or the entity; or | II. receive more than 30% of any capital distribution 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. | Section 360-20 operates to remove an investor's entitlement to a tax offset under section 360-15 if both the requirements in subsection 360-20(1) are met. | Furthermore, the shareholders must satisfy section 360-25 entitling them to the full 20% tax offset when the full subscription amount is called upon over a two-year period. | Based on the facts provided, the Commissioner is satisfied the amounts the Company is entitled to receive from the shareholders as outlined in the Subscription Agreement is the amount of the tax offset the shareholders are entitled to.