Solving subdiv 360-A's 'affiliate' problem

Graw, Stephen (2020) Solving subdiv 360-A's 'affiliate' problem. Australian Tax Forum, 35 (3). pp. 267-295.

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Abstract

Subdivision 360-A provides investors in ‘early stage innovation companies’ with tax incentives in the form of a non-refundable tax offset equal to 20% of the value of their investments and a ‘modified CGT treatment’ for any gains or losses they ultimately realise on those investments. There are however a number of conditions that must be met and a number of situations in which the incentives are not available. One such restriction is the s 360-15(1)(d) requirement that the investor and the company not be ‘affiliates of each other’ immediately after the investment. If they are, the investor is denied the tax offset and, because the modified CGT treatment is only available if there is an entitlement to a tax offset, it is denied too. At least on its face, that would seem to mean that the founders of early stage innovation companies could be denied the tax incentives for money that they invest in their ‘baby’ and, given the difficulty of attracting other investors at that early stage of the company’s life-cycle, that could, inadvertently, defeat the legislation’s primary aim of encouraging and rewarding entrepreneurial risk-taking. Fortunately (or unfortunately depending on your perspective) the definition of ‘affiliate’ in s 328-130 is such that it would appear to be relatively simple for founders to circumvent the limitation and qualify for the tax incentives, at least indirectly, by structuring their investments appropriately. This paper analyses the operation and scope of the denial provision and suggests possible options for closing, at least in part, what appears to be an inadvertent ‘loophole’.

Item ID: 64260
Item Type: Article (Research - C1)
ISSN: 0812-695X
Keywords: ESIC, affiliate, tax concession, tax offset, modified CGT treatment, entrepreneurial risk-taking
Date Deposited: 08 Sep 2020 18:42
FoR Codes: 18 LAW AND LEGAL STUDIES > 1801 Law > 180125 Taxation Law @ 100%
SEO Codes: 94 LAW, POLITICS AND COMMUNITY SERVICES > 9499 Other Law, Politics and Community Services > 949999 Law, Politics and Community Services not elsewhere classified @ 100%
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