Private ruling: Income Tax: Tax Incentive for Early Stage Investors
Date of advice: 29 June 2017
Published: October 2017
Ruling period: Year ending 30 June 2017

Ruling: Q1: For the shares issued by the qualifying ESIC mid-late 2016, Is Trust A entitled to the early stage tax incentive under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: For the shares issued by the qualifying ESIC early 2017, Is Trust A entitled to the early stage tax incentive under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes. | Q3: For the shares issued by the qualifying ESIC on DDMMYY, Is Trust A entitled to the early stage tax incentive under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A3: Yes. | Q4: For the additional shares issued by the qualifying ESIC on DDMMYY, Is Trust A entitled to the early stage tax incentive under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A4: Yes. | Q5: For the additional shares “allotted” by the qualifying ESIC on DDMMYY, Is Trust A entitled to the early stage tax incentive under subsection 360-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A5: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. 1. Trust A is a private investment trust and has long term investments in a number of commercial properties, listed and unlisted shares. 2. Company Z meets the criteria of an Early Stage Innovation Company (ESIC) under subsection 360-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997). 3. Trust A entered into an agreement with the qualifying ESIC to purchase a 10% interest. 4. X was a director of the qualifying ESIC for a period of 1 month. 5. Trust A’s total shareholding in the qualifying ESIC is 7%. 6. There is no common ownership or capital backing between the qualifying ESIC and Trust A. 7. There is no obligation to for either entity to purchase goods or services. Information provided 8. You have provided information in a number of documents and phone conversations in relation to your connection with the ESIC entity, including: ● your private ruling application. ● our phone conversation with you. ● supplementary information provided. 9. 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 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. | Summary: For the shares issued by the qualifying ESIC mid-late 2016, the trustee and beneficiaries of Trust A are entitled to the early stage tax offset, under, subsection 360-15(1). | Detailed Reasoning - Entitlement to the tax offset: General case 1. Section 360-15 outlines the criteria required for an entity to be entitled to the early stage tax offset at a particular time in an income year. 2. Subsection 360-15(1) states an entity (other than a trust or partnership) is entitled to a tax offset for an income year if during that year the entity was issued with shares by a qualifying ESIC, provided the entity was not in a restricted relationship at the relevant time. 3. Paragraph 360-15(1)(d) states that neither you nor the company is an affiliate of each other at that time. 4. Paragraph 360-15(1)(f) provides that immediately after the time of the issue of shares, you do not hold more than 30% of the equity interests in the company or in an entity connected with the company. Members of partnership or trust 5. 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; Trustees 6. Subsection 360-15(2) states that a trustee of a trust is entitled to a tax offset for an income year if the trustee would be entitled to a tax offset, under subsection (1), for the income year if the trustee were an individual; and 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. | Detailed Reasoning - Affiliate rules: 7. Subsection 360-15(1) (d) states that neither you nor the company is an affiliate of each other at that time. 8. 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. 9. 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. 10. 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. | Detailed Reasoning - Application to your circumstances: General case 11. Trust A is not entitled to a tax offset for the 2017 income year under subsection 360-15(1) as it is a trust. Members of partnership or trust 12. As trusts are generally not subject to tax in their own right they would not receive any benefit from a tax offset. 13. However, subsection 360-15(2) provides that a member of a trust at the end of the income year is entitled to a tax offset for the income year if the trust would be entitled to a tax offset under subsection 360-15(1) as if it were an individual. 14. Trust A was issued with shares in XYZ on three separate occasions (mid-late 2016, early 2017 and DDMMYY) during the 2017 income year. 15. The shares issued by the qualifying ESIC to Trust A are newly issued shares. 16. Company Z is a qualifying ESIC as set out in subsection 360-40(1). 17. Trust A has invested in the qualifying ESIC as an arms-length bona fide investor. The issue of shares are not an acquisition of ESS interests under an employee share scheme. 18. Trust A has a total equity interest of 7% in Company Z; so immediately after each issue of shares by the qualifying ESIC to Trust A, did it exceed the 30% equity interest restriction as per paragraph 360-15(1)(f). Trustees 19. As stated in paragraph 12, trusts are generally not subject to tax in their own right however, there are certain circumstances where a trustee of a trust is entitled to the tax offset. 20. Subsection 360-15(3) provides that a trustee of a trust at the end of the income year is entitled to a tax offset for the income year if the trust would be entitled to a tax offset under subsection 360-15(1) as if it were an individual and it was 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. | Detailed Reasoning - Affiliate rules: 21. Paragraph 360-15(1)(d) states that neither you nor the company is an affiliate of each other at that time. 22. An affiliate is defined as an individual or company that, in relation to business affairs, acts or could reasonably be expected to act in accordance with your directions or wishes or in concert with you. 23. There is no evidence that the qualifying ESIC is acting or could reasonably be expected to act in accordance with the direction and wishes of Trust A. Trust A has only a 7% shareholding in the qualifying ESIC, whereas the inventor is the majority shareholder and director. 24. Neither Trust A nor the qualifying ESIC have a financial relationship and are not financially dependent on each other. 25. The qualifying ESIC does not seek consultation from Trust A on business matters. 26. Neither entity has a formal obligation to purchase goods or services or conducts aspects of their respective business with the other entity. 27. Whilst X was a Director of the qualifying ESIC for a one month period, and provided administration and investment assistance to the qualifying ESIC in that time, these activities do not meet the definition of affiliate. 28. As the qualifying ESIC does not or could not reasonably be expected to act, in accordance with Trust A directions or wishes, or in concert with Trust A. 29. Therefore neither Company Z nor Trust A is an affiliate of each other. Conclusion 30. The trustee and beneficiaries of Trust A are entitled to a tax offset for the income year commencing on 1 July 2016 pursuant to subsection 360-15(2) and (3) in relation to the shares issued to Trust A by the qualifying ESIC mid-late 2016. | Summary: For the shares issued by the qualifying ESIC early 2017, the trustee and beneficiaries of Trust A are entitled to the early stage tax offset, under, subsection 360-15(1). | Detailed Reasoning - Detailed reasoning: See paragraphs 1 to 10 | Detailed Reasoning - Application to your circumstances: 31. In line with paragraphs 11 to 30 above, the shares issued early 2017 are eligible for early stage tax offset. Conclusion 32. The trustee and beneficiaries of Trust A are entitled to a tax offset for the income year commencing on 1 July 2016 pursuant to subsection 360-15(2) and (3) in relation to the shares issued to Trust A by the qualifying ESIC early 2017. | Summary: For the shares issued by the qualifying ESIC on DDMMYY, the trustee and beneficiaries of Trust A are entitled to the early stage tax offset, under, subsection 360-15(1). | Detailed Reasoning - Detailed reasoning: See paragraphs 1 to 10 | Detailed Reasoning - Application to your circumstances: 33. In line with paragraphs 11 to 30 above, the shares issued on DDMMYY are eligible for early stage tax offset. Conclusion The trustee and beneficiaries of Trust A are entitled to a tax offset for the income year commencing on 1 July 2016 pursuant to subsection 360-15(2) and (3) in relation to the shares issued to Trust A by the qualifying ESIC on DDMMYY. | Summary: For the additional shares issued by the qualifying ESIC on DDMMYY, the trustee and beneficiaries are entitled to the early stage tax offset, under, subsection 360-15(1). | Detailed Reasoning - Detailed reasoning: See paragraphs 1 to 10 | Detailed Reasoning - Application to your circumstances: 34. In line with paragraphs 11 to 30 above, the additional shares issued on DDMMYY are eligible for early stage tax offset. Conclusion 35. The trustee and beneficiaries are entitled to a tax offset for the income year commencing on 1 July 2016 pursuant to subsection 360-15(2) and (3) in relation to the shares issued to Trust A by the qualifying ESIC on DDMMYY. | Summary: For the additional shares “allotted” by the qualifying ESIC on DDMMYY, the trustee and beneficiaries are entitled to the early stage tax offset, under, subsection 360-15(1). | Detailed Reasoning - Detailed reasoning: See paragraphs 1 to 10 | Detailed Reasoning - Application to your circumstances: 36. In line with paragraphs 11 to 30 above, the additional shares “allotted” to Trust A on DDMMYY are eligible for early stage tax offset. Conclusion 37. The trustee and beneficiaries are entitled to a tax offset for the income year commencing on 1 July 2016 pursuant to subsection 360-15(2) and (3) in relation to the shares issued to Trust A by the qualifying ESIC on DDMMYY.