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Capital Injection in Return for Equity in a Private Trust or Company

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Person considered to be a genuine investor

A person will be considered to be a genuine investor where they provide capital to an entity in return for equity. Where a person is considered to be a genuine investor in an entity they will be ascribed the historical value of the injection of capital. See below for further information on the treatment of injections of capital to fixed unit private trusts and private companies.

Criteria for genuine injection of capital in return for equity in a private company

A genuine injection of capital will have occurred when all of the following occur:

  • an actual injection of capital has been made,
  • the person who made the capital injection is not an attributable stakeholder of the company,
  • the person who made the capital injection received shares in the company in return for the capital injection,
  • the amount of the shares was reasonably commensurate with the amount of the capital injection,
  • the person has a right to dividends, and that right is reasonably commensurate with the amount of the capital injection,
  • the person has a right to capital on wind-up of the company, and that right is reasonably commensurate with the amount of the capital injection,
  • the person was aged 18 years or over at the time the capital injection was made, and
  • in the opinion of the delegate, the injection of capital was genuine.
Treatment if injection of capital is genuine

The person who genuinely injected capital will have the historical value of the injection of capital assessed against them. If the injection of capital is genuine, it will not be regarded as income of the attributable stakeholder(s). The amount of the injection will be included in the entity's assets. However, the entity's assets will also be reduced by the historical value of the injection. Reasonable dividend payments can also be made to the person who injected the capital and will not be treated as income or as a gift of the attributable stakeholder/s. Such dividends will be treated as income of the genuine investor for 12 months from the date of distribution.    

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Policy Library – Overview of Ordinary Income

Section 10.1.1

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Assessing historical value of injection to a company is subject to conditions

Assessing the historical value of the injection of capital assessed against the person who genuinely injected the capital is subject to two conditions:

  • the amount will be limited to the percentage share holding purchased, but must be less than 50% of the present capital value of the company, and
  • if the value of the company falls, the amount of the historical value attributed to the person may be subject to reduction, based on the information provided by that person, and taking into account the current and past circumstances of the company.
Reason for assessing historical value of injection

Limiting the amount to the historical value reflects the actual contribution, while recognising the reality that a non-attributable stakeholder relies entirely on the goodwill of the attributable stakeholder as:

  • the investor may never regain access to their investment, let alone any appreciation, and
  • until such time as a capital distribution is made, the attributable stakeholder has the enjoyment of the funds injected, including any appreciation.
Genuine injection of capital in return for equity in a private trust

A genuine injection of capital in return for equity in a private trust can only occur where the trust is a fixed trust, and the person obtains units in return for the injection of capital. The value of the units (using the net asset backing method) will be treated as an asset of the person who injected the capital. However if the injection of capital occurs after 7.30pm 9 May 2000, the guidelines regarding the assessment of fixed trusts should be examined to ensure whether, under the source test, the assets and income of the trust should be attributed via the normal attribution rules.    

Note that it is not possible to obtain equity in a discretionary trust.


An individual will be treated as a genuine investor in a private company where:

  • an actual injection of capital or equity has been made,
  • the person who made the capital injection is not an attributable stakeholder of the company,
  • the person receives shares in the company commensurate with the amount of capital injection,
  • the person has a right to capital upon wind-up commensurate with the total capital injection,
  • the person has a right to dividends reasonably commensurate with the total capital injection,
  • the person is over 18 years of age at the time the capital injection was made, and
  • in the opinion of the delegate, the injection of capital was genuine.

A genuine injection of capital in return for equity in a private trust can only occur where the trust is a fixed trust, and the person obtains units in return for the injection of capital. Genuine investors have the historical value of the injected equity capital assessed as their asset.

 

 

An entity means any of the following:

an individual,

a company,

a trust,

a business partnership,

a corporation sole,

a body politic.

Historical value in relation to a trust or company means the original amount of capital invested by a stakeholder in the entity at a particular time or over a period of time.

According to section 52ZZJ of the VEA, a person is an attributable stakeholder if a company or trust is a controlled private company or trust in relation to the individual unless the Commission determines otherwise.

 

 

Historical value in relation to a trust or company means the original amount of capital invested by a stakeholder in the entity at a particular time or over a period of time.

According to section 52ZZJ of the VEA, a person is an attributable stakeholder if a company or trust is a controlled private company or trust in relation to the individual unless the Commission determines otherwise.

 

 

An individual will be treated as a genuine investor in a private company where:

  • an actual injection of capital or equity has been made,
  • the person who made the capital injection is not an attributable stakeholder of the company,
  • the person receives shares in the company commensurate with the amount of capital injection,
  • the person has a right to capital upon wind-up commensurate with the total capital injection,
  • the person has a right to dividends reasonably commensurate with the total capital injection,
  • the person is over 18 years of age at the time the capital injection was made, and
  • in the opinion of the delegate, the injection of capital was genuine.

A genuine injection of capital in return for equity in a private trust can only occur where the trust is a fixed trust, and the person obtains units in return for the injection of capital. Genuine investors have the historical value of the injected equity capital assessed as their asset.

 

 

Units in relation to a trust, include a beneficial interest, however described, in the property or income of the trust.

The net asset backing method provides the least complex and consistent basis for assessing the value of private companies. The method values the shares in a private company by calculating the:

  • adjusted net asset position of the company, by deducting company liabilities from the current market value of the assets, and
  • assessable value of shares by determining the amount of surplus capital that would accrue to each share if wound-up.

The calculation is based upon information in the company balance sheet and depreciation schedule taking into consideration the current market value rather than the historical value as may appear in the balance sheet.

An individual passes the source test in relation to a trust or company if:

  • the individual has transferred property or services to the entity after 7.30 pm, by standard time in the Australian Capital Territory, on 9 May 2000, and
  • the underlying transfer was made for no consideration or for a consideration less than the arm's length amount in relation to the underlying transfer.