Private ruling: Early stage innovation offset
Date of advice: 7 December 2018
Published: April 2019
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: In respect of the shares issued by the Company to the Trust, if the Trust had been an individual, would it have been 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. The founder was the sole director and shareholder of the Company on incorporation. 2. A corporate trustee (the trustee) is the trustee of the Trust. 3. The directors of the trustee are beneficiaries of the Trust. 4. For the year ended 30 June 20XX the Company meets the criteria of an Early Stage Innovation Company (ESIC) under subsection 360-40(1) of the ITAA 1997. 5. The Trust applied to purchase ordinary shares in the Company. 6. The number of shares held by the Trust was 25% of the total number of ordinary shares issued by the Company. 7. One of the directors of the corporate trustee was appointed as a director of the Company. 8. The number of directors of the Company at this time was four. 9. The Trust’s investment in the Company was their only investment in an ESIC. 10. The shares were not issued under an employee share scheme. 11. There were less than 50 shareholders in the Company. 12. The constitution of the Company indicates that: ● quorum is achieved with a minimum of two directors present; ● the directors may elect a director to be the chairperson; ● questions arising at a meeting of directors must be decided by a majority vote. The chairperson does not have the casting vote. If a vote is tied, the motion is not passed. 13. In respect of the relationship between the Company and the trustee company: ● There is no inter-dependency between them excepting the investment in the Company. ● There is no obligation to purchase goods or services or conduct business with either. ● The business affairs of are completely independent.

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: Detailed Reasoning - Members of partnership or trust – entitlement to offset: 14. 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: 15. 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 ITAA 1997 for the income year. 16. 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. 17. 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 - Individual’s entitlement to offset - 360-15(1): 18. 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. 19. The investor must also satisfy section 360-20 to satisfy subsection 360-15(1). | Detailed Reasoning - Conclusion – background: 20. The Trust 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. 21. The trustee or the members of the trust will only be entitled to the offset if the trust had been an individual and passes the tests under 360-15(1). | Detailed Reasoning - Company issues shares that are equity interests: 22. The shares issued to the Trust represent an equity interest in the Company. | Detailed Reasoning - Subsection 360-40(1) applies to the Company: 23. The Company was an ESIC immediately after the shares were issued. | Detailed Reasoning - Neither the company nor the individual is an affiliate: 24. 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. 25. 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. 26. 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. 27. In examining the Trust it is a family trust established for the benefit of two beneficiaries. The corporate trustee is the trustee for the Trust and the two beneficiaries are the directors and shareholders in this company. One director has been appointed as both Guardian and Appointor for the Trust and is responsible for making decisions for and on behalf of the Trust. 28. In this case, the relationship between the Trust and the Company is summarised as: a. The Company has four directors and one is the director of the Trustee. b. The Company has four unrelated shareholders and one is the Trust. Each shareholder holds an equal proportion of ordinary shares in the Company. c. There is no obligation to purchase goods or services or conduct business between either the Company or the Trust. d. The business affairs of the Company and the Trust are completely independent. e. All shareholder and board resolutions for the Company are passed by simple majority unless a separate shareholder resolution. f. The constitution of the Company indicates that: i. Quorum is achieved with a minimum of two directors present; ii. The directors may elect a director to be the chairperson; iii. Questions arising at a meeting of directors must be decided by a majority vote. The chairperson does not have the casting vote. If a vote is tied, the motion is not passed. 29. As a director of both the trustee and the Company you could not conclude that when the individual is making a business decision as a director of the Company he is acting independently. When making decisions in his capacity as a director of the Company, the individual is equally acting in his capacity as the controlling individual of the Trustee. 30. However the Trust only controls 25% of the Company and at least two other directors need to agree on business decisions for them to be passed in the Company. 31. In examining the above factors there is no indication that the Company would act, or reasonably be expected to act, in accordance with the individual’s directions or wishes in relation to the affairs of the business of the Company and vice versa. 32. In this case, the Company is being effectively controlled evenly by the four shareholders. 33. Therefore the Trust and the Company are not affiliates of each other. | Detailed Reasoning - Acquired under an employee share scheme: 16. The shares were not issued under an employee share scheme. | Detailed Reasoning - The individual didn’t hold more than 30% of the equity interests: 17. The equity interest held after 11 July was 25% | Detailed Reasoning - Section 360-20: 34. Section 360-20 places restrictions to the amount certain kinds of investors can invest in ESICs and still be entitled to the offset. 35. In effect an investor who is not a 'sophisticated investor' under the Corporations Act 2001 , will not be entitled to the offset if their total investment across all ESICs is more than $50,000 in the income year. 36. In this case the Trust’s sole investment in an ESIC was the $25 paid for its interest in the Company. Consequently section 360-20 does not apply as the total investment has not exceeded $50,000. | Detailed Reasoning - Conclusion 360-15(1): 37. Had the Trust been an individual it would have been entitled to the offset under subsection 360-15(1).