Home » News » New ATO Taxpayer Alert (TA 2024/1) for Early Stage Investor Tax Offset Claimed using Circular Financing Arrangements

New ATO Taxpayer Alert (TA 2024/1) for Early Stage Investor Tax Offset Claimed using Circular Financing Arrangements

December 16th, 2024

On 10 December 2024 the ATO released TA 2024/1: Early stage investor tax offset claimed using circular financing arrangements.

 

The alert notes that:
  • The ATO are currently reviewing cases where individuals have claimed the early stage investor tax offset on shares acquired through tailored financing arrangements. These arrangements appear designed to artificially meet the conditions for claiming the maximum tax offset, allowing individuals to benefit with minimal (if any) risk on their investment. Entities promote, orchestrate, and finance these schemes primarily for the individuals to obtain the tax offset, with the refunded offset shared with those entities
  • These arrangements typically display all or most of the following features.
    • The individual becomes or is made aware of an opportunity to invest in a start-up company.
    • The company is held out to qualify as an early stage innovation company (ESIC) under subsection 360-40 of the Income Tax Assessment Act 1997 (ITAA 1997).
    • A financing arrangement is offered to fund the individual’s share subscription amount, less any nominal deposit required. This enables the individual to acquire shares, typically up to an amount that qualifies for the maximum tax offset.[1]
    • The company places the subscription amount back on deposit with the financier who controls the use of the subscription monies by the company. This includes limiting that amount which the company can directly apply to further its stated innovation and commercialisation activities.
    • The individual claims the tax offset in their tax return and receives a refund.[2] This refund is typically available as the tax offset reduces the individual’s tax liability on their salary and wage income, enabling a refund of PAYG withholding or other credits.
    • The tax offset refund is used to partially repay the finance.
    • The remainder of the financing is repaid by the individual within a short period out of subscription monies returned to the individual by the company. This returned amount is typically by way of selective share buy-back (or other disposal) of some or all of the individual’s shares.

As assessment of eligible notional deductions for the research and development tax incentive is one of the possible pathways to determine if a company will qualify as an early stage innovation company (ESIC), this alert may be relevant to some R&D entities.

Taxpayers should review their affairs in line with the ATO alert and guidance and take action where required.

Please get in touch with our office if you require assistance, would like to speak to someone about a potential claim, or check out our website for more information.

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