Additional conditions if the CGT asset is a share or trust interest
To be eligible for the small business capital gains tax (CGT) concessions where the CGT asset is a share in a company or interest in a trust, you must meet:
- the basic conditions for the small business CGT concessions
- the following additional basic conditions for a share in a company or interest in a trust.
Find out about:
See also:
Additional conditions for the small business CGT concessions
Follow these steps to determine whether you meet the additional basic conditions if the CGT asset is a share in a company or interest in a trust.
- You either:
- Just before the CGT event, either:
- The company or trust, when applying the modified connected entity rule in determining entities controlled by it, must either:
- Your shares or interest must meet the modified active asset test.
CGT concession stakeholder
You are a CGT concession stakeholder of a company or trust if you are either:
You can hold the small business participation percentage directly or indirectly through one or more interposed entities. You work out the small business participation percentage in the same way as the significant individual test explained below.
Example 1: CGT concession stakeholder
There are 100 issued shares in Company X, all with equal voting, dividend and distribution rights. Joe owns 99 shares and his wife, Anne, owns one share. Joe is a significant individual in the company and Anne has a small business participation percentage in the company greater than zero. Therefore, they are both CGT concession stakeholders. Anne and Joe may be entitled to the small business concessions when they sell their shares.
End of exampleIf a company or trust has claimed the small business 15-year exemption or the small business retirement exemption, a CGT concession stakeholder may receive an exempt amount from the company or trust if the conditions are satisfied.
Significant individual test
You are a significant individual in a company or trust if you have a small business participation percentage in the company or trust of at least 20%. This 20% can be made up of direct and indirect percentages.
A company or trust meets the significant individual test if it had at least one significant individual just before the CGT event.
To access the small business 15-year exemption, the company or trust must have had a significant individual for periods totalling at least 15 of the years that the CGT asset was owned.
Small business participation percentage
An entity’s small business participation percentage in another entity at a time is the sum of:
Direct small business participation percentage
Companies
An entity’s direct small business participation percentage in a company is the smallest percentage out of:
- the percentage of the voting power in the company that the entity is entitled to exercise (except for jointly owned shares)
- the percentage of any dividend payment that the entity is entitled to receive
- the percentage of any capital distribution that the entity is entitled to receive.
Take all classes of shares (other than redeemable shares) into account when determining an entity’s participation percentage.
Ignore the voting power calculation for jointly owned shares, because neither owner individually controls the voting power.
Example 2: Smallest percentage
Lana has shares that entitle her to 30% of any dividends and capital distributions of Bean Co. The shares do not carry any voting rights.
Lana’s direct small business participation percentage in Bean Co is 0%. Although she is entitled to 30% of dividends and capital distributions, her percentage share of the voting rights is nil. Lana must use the smallest percentage to calculate her small business participation percentage.
End of example
Example 3: Significant individual
A company has two different classes of shares, A and B, which have equal voting and distribution rights. Isaac holds 20% of the shares of each class.
The directors can decide to make a distribution of income or capital to either class of shares to the exclusion of the other class of shares. Isaac always receives 20% of any distribution made by the company, regardless of how the directors exercise their discretion. This makes Isaac a significant individual, holding 20% of the voting power.
If Isaac holds only the class A shares and no class B shares, he is not a significant individual. His right to receive the distribution will only be notional, and dependent on how the directors exercise their discretion to make distributions.
End of exampleTrusts
An entity’s direct small business participation percentage in a trust, where entities have entitlements to all the income and capital of the trust, is the lower percentage of either:
- the income of the trust that the entity is beneficially entitled to
- the capital of the trust that the entity is beneficially entitled to.
An entity’s direct small business participation percentage in a trust (where entities do not have entitlements to all the income and capital of the trust, and the trust makes a distribution of income or capital) is the lower percentage of either:
- distributions of income that the entity is beneficially entitled to during the income year
- distributions of capital that the entity is beneficially entitled to during the income year.
Discretionary trusts with tax losses or no net income
An entity can use another method to work out their small business participation percentage in a discretionary trust if, in the CGT event year, both:
- the trustee did not make a distribution of income or capital during the income year
- the trust had no net income or had a tax loss for the income year.
The entity's direct small business participation percentage at the relevant time is the percentage of the distributions the entity was beneficially entitled to in the last income year before the CGT event in which the trustee made a distribution.
An entity's small business participation percentage is zero if either:
- the trust had net income and did not have a tax loss, and the trustee decided not to distribute
- the trustee has never made a distribution in the income years up to and including the CGT event year (including where the trust had no net income or had a tax loss in each of those income years).
Example 4: Discretionary trust that has had a tax loss
XYZ Trust entities don't have entitlements to all of the income and capital of the trust. The objects of the trust are Evan, Mario, Denise and Katrina.
After a bad trading year, XYZ Trust sells its shares in an operating company and makes a capital gain. XYZ Trust has a tax loss and makes no distributions in the CGT event year.
In the year prior to the CGT event year, the trustee makes a distribution of income to Evan and Mario of 20% each and to Denise and Katrina of 25% each.
Evan, Mario, Denise and Katrina each have a small business participation percentage in XYZ trust of at least 20%. They are therefore all significant individuals and CGT stakeholders in XYZ trust.
End of exampleIndirect small business participation percentage
An entity’s indirect small business participation percentage in a company or trust is the entity’s direct participation percentage in an interposed entity multiplied by the interposed entity’s total participation percentage (both direct and indirect) in the company or trust.
An indirect interest can be held through one or more interposed entities.
Example 5: Trusts – calculating participation percentage
ABC Trust owns 100% of the shares in Operating Co. Therefore, ABC Trust has a 100% direct interest (and no indirect interest) in Operating Co. Jennifer, Bill and Nicky are the objects of ABC trust.
Jennifer
Jennifer receives 80% of the distributions from ABC Trust. Therefore, she has a direct participation percentage of 80% in ABC Trust.
Jennifer’s participation percentage in Operating Co is calculated by multiplying Jennifer’s direct participation percentage in ABC Trust and ABC Trust’s total participation percentage in Operating Co:
Jennifer has an 80% participation percentage in Operating Co, so she is a significant individual of Operating Co.
Bill
Jennifer's spouse, Bill, receives 15% of the distributions from ABC Trust. Therefore, he has a direct participation percentage of 15% in ABC Trust.
Bill’s participation percentage in Operating Co is calculated by multiplying his direct participation percentage in ABC Trust and ABC Trust’s total participation percentage in Operating Co:
Bill has a 15% participation percentage in Operating Co, so he is not a significant individual of Operating Co.
However, as a spouse of a significant individual with a participation percentage greater than zero in the entity, Bill will be a CGT concession stakeholder.
Nicky
Nicky receives 5% of the distributions from ABC Trust. Therefore, she has a direct participation percentage of 5% in ABC Trust.
Nicky’s participation percentage in Operating Co is calculated by multiplying her direct participation percentage in ABC Trust and ABC Trust’s total participation percentage in Operating Co:
Nicky has a 5% participation percentage in Operating Co, so she is not a significant individual of Operating Co. Nicky is not a CGT concession stakeholder.
End of exampleAs with the direct small business participation percentage, an object of a discretionary trust may calculate their indirect small business participation percentage to be more than zero, if the trust had a tax loss or no net income for the income year.
See also:
The 90% test
The 90% test only applies if there is an interposed entity between the CGT concession stakeholders and the company or trust in which the shares or interests are held. The interposed entity will be the entity accessing the concessions.
The test is satisfied if CGT concession stakeholders in the company or trust in which the shares or interest are held have a total small business percentage in the entity claiming the concession of at least 90%. As with the significant individual test, the participation percentage can be held directly or indirectly through multiple interposed entities.
Example 6: The 90% test for ABC Trust
Based on Example 5 above:
- Jennifer, a significant individual and CGT concession stakeholder of Operating Co, has an 80% small business participation percentage in ABC Trust
- Bill, a CGT concession stakeholder of Operating Co, has a 15% small business participation percentage in ABC Trust
- Nicky, who is not a CGT concession stakeholder of Operating Co, has a 5% small business participation percentage in ABC Trust.
At least 90% of the participation percentages in ABC Trust are held by CGT concession stakeholders of Operating Co (Jennifer and Bill). As a result, ABC Trust satisfies the ownership requirement if it sells its shares in Operating Co, and can access the concessions on those shares, provided the other conditions are met.
End of example
Example 7: The 90% test for a discretionary trust
DEF is a discretionary trust. Anna receives 90% of DEF's distributions.
DEF has shares in 50% of an operating company, which it sells.
The trust is not a CGT concession stakeholder in the company because it is not an individual.
Anna has an indirect interest in the operating company of 45% (90% × 50%). As this is more than 20%, she is a CGT concession stakeholder in the operating company.
As Anna's interest in DEF is 90% and she is a CGT concession stakeholder in the company that is sold, the 90% test is satisfied. Provided the other conditions are met, DEF can access the concessions on the capital gains it makes from selling the shares in the operating company.
End of exampleModified connected entity rule
The company or trust must be a small business entity or satisfy the maximum net asset value test. When applying each of these tests, the company or trust must include the annual turnovers and assets of its affiliates and entities controlled by it.
Under the modified connected entity rule, the company or trust controls another entity if it has a control percentage of at least 20% or more in that other entity.
Any Commissioner's determination that the entity does not control another entity (a control percentage of at least 40% but less than 50%) is disregarded for the modified connected entity rule.
Example 8: modified connected entity rule
Colour Co is a small business entity with an aggregated turnover of less than $2 million (when applying the general connected entity rule of which none of Red Co, Big Green Co and Blue Co would be connected with Colour Co as Colour Co holds less than 40% of shares in each of them).
Big Green Co has an annual turnover of $5 million (from dealings unrelated to Colour Co) and the net value of its assets is $20 million.
To determine whether Colour Co is a small business entity or satisfies the maximum net asset value test when applying the modified connected entity rule, Colour Co must include the annual turnovers and the net asset values of Red Co, Big Green Co and Blue Co as they are controlled by Colour Co (Colour Co owns 20% of the shares in each of them.).
Given Big Green Co's annual turnover alone is $5 million, Colour Co would not be a small business entity with an aggregated turnover of less than $2 million.
Colour Co also would not satisfy the maximum net asset value test as the total net value of the assets owned by Colour Co and entities controlled by it exceeds $6 million given the net value of Big Green Co's assets alone is $20 million.
End of exampleModified active asset test
In determining whether your share or interest meets the modified active asset test, your share or interest must have been an active asset with some modifications to the 80% test.
Whilst the modified 80% test must be satisfied for at least half of the asset ownership period, it does not need to be applied on a day-to-day basis.
When applying the modified 80% test, a share in a company or an interest in a trust will continue to be an active asset at a later time if:
- it was an active asset at an earlier time
- it is reasonable to conclude that the share or interest is still an active asset at the later time.
A temporary breach of this requirement will not result in the test being failed.
Follow these steps to work out if your share or interest meets the modified 80% test.
Step 1
Work out the total market value of both:
In working out the total market value (Step 1 amount), exclude the market value of shares or interests held, directly or indirectly, by the company or trust.
Step 2
Work out the total market value of both:
- the active assets of the company or trust
- the active assets of a later entity, multiplied by that percentage.
Assets of a later entity are only active assets if both:
Step 3
At least 80% of the Step 1 amount must be made up of:
Any cash or financial instrument acquired or held for a purpose that includes ensuring the company or trust satisfies this 80% requirement is disregarded.
Example 9: fails the modified active asset test
Jesse is a sole trader and is a small business entity with an aggregated turnover of less than $2 million (applying the general connected entity rule) for the 2018–19 income year.
Jesse owns 50% of the shares in Cleaning Co, which is a small business entity with an aggregated turnover of less than $2 million (applying the modified connected entity rule) for the 2018–19 income year. The total market value of Cleaning Co's assets (excluding shares in Marketing Co and Deposit Co) is $2.5 million, of which $2 million is the value of its active assets. Cleaning Co has no amount of cash and financial instruments inherently connected to its business.
Cleaning Co owns 10% of Marketing Co, which is a small business entity with an aggregated turnover of less than $2 million and is not an affiliate of Cleaning Co. The total market value of Marketing Co's assets is $1 million, of which $900,000 is the value of its active assets. The remaining $100,000 is cash and financial instrument inherently connected to its business.
Cleaning Co owns 100% of Deposit Co, whose only asset is cash of $1 million and it does not carry on a business.
There has been no significant change in the activities or holdings of Cleaning Co, Marketing Co and Deposit Co over the period Jesse has owned his shares.
On 9 November 2018, Jesse sells his shares in Cleaning Co.
The shares need to meet the modified active asset test for Jesse to qualify for the small business CGT concessions.
Step 1:
The total market value of the assets in Cleaning Co and other entities that Cleaning Co has a small business participation percentage in (that is, Marketing Co and Deposit Co) is $3.6 million. This is the sum of the value of:
- Cleaning Co's assets of $2.5 million
- Marketing Co's assets of $100,000 (calculated by multiplying the value of Marketing Co's assets by Cleaning Co's participation percentage in it, that is, $1 million × 10%)
- Deposit Co's asset of $1 million (calculated by multiplying the value of Deposit Co's assets by Cleaning Co's participation percentage in it, that is, $1 million × 100%).
Step 2:
The market value of Cleaning Co's active assets is $2 million.
An asset of Marketing Co can only be an active asset if Jesse is a CGT concession stakeholder of Marketing Co.
Jesse's participation percentage is 5% in Marketing Co, calculated as:
- 50% (Jesse's participation percentage in Cleaning Co), multiplied by 10% (Cleaning Co's participation in Marketing Co.
As Jesse's participation percentage in Marketing Co is less than 20% and Jesse is not a spouse of a significant individual in Marketing Co, he is not a CGT concession stakeholder of Marketing Co. None of Marketing Co's assets is an active asset under the modified active asset test.
Deposit Co has no active asset.
The Step 2 amount is $2 million.
Step 3:
The market value of active assets and cash and financial instruments inherently connected to a business carried on by Cleaning Co, Marketing Co and Deposit Co works out to be $2.1 million (that is, $2 million and $100,000).
As this is only 58% of the Step 1 amount ($2.1 million ÷ $3.6 million) and noting there have been no significant changes to the activities or holdings of the relevant entities during the ownership period, Jesse's shares in Cleaning Co do not meet the modified active asset test.
End of example
Example 10: meets the modified active asset test
Karen is a sole trader and is a small business entity with an aggregated turnover of less than $2 million (applying the general connected entity rule) for the 2018–19 income year.
Karen owns 50% of the shares in Consulting Co, which is a small business entity with an aggregated turnover of less than $2 million (applying the modified connected entity rule) for the 2018–19 income year.
The total market value of Consulting Co's assets (excluding the value of shares in Big Co and Media Co) is $1 million, of which $980,000 is the value of its active assets.
Consulting Co also owns 1,000 shares of the 10 million shares in Big Co. Consulting Co's small business participation percentage in Big Co is 0.01%. The total market value of Big Co's assets is $100 million.
Consulting Co also owns 50% of Media Co, which is a small business entity with an aggregated turnover of less than $2 million. The total market value of Media Co's assets is $1.2 million, of which $1 million is the value of its active assets.
There are no significant amount of cash and financial instruments inherently connected to the business of Consulting Co and Media Co.
There has been no significant change in the activities or holdings of Consulting Co, Big Co and Media Co over the period Karen has owned the shares.
On 20 April 2019, Karen sells her shares in Consulting Co.
The shares need to meet the modified active asset test for Karen to qualify for the small business CGT concessions.
Step 1:
The total market value of the assets in Consulting Co and other entities that the Consulting Co has a small business participation percentage in (that is, Big Co and Media Co) is $1,610,000. This is the sum of the value of:
- the Consulting Co's assets of $1 million
- the Big Co's assets of $10,000 (calculated by multiplying the value of Big Co's assets by Consulting Co's participation percentage in it, that is, $100 million × 0.01%)
- the Media Co's asset of $600,000 (calculated by multiplying the value of Media Co's asset by Consulting Co's participation percentage in it, that is, $1.2 million x 50%).
Step 2:
The market value of Consulting Co's active assets is $980,000.
An asset of Media Co can only be an active asset for Consulting Co if Karen is a CGT concession stakeholder of Media Co.
Karen's participation percentage is 25% in Media Co, calculated as:
- 50% (Karen's participation percentage in Consulting Co), multiplied by 50% (Consulting Co's participation percentage in Media Co).
As Karen's participation percentage in Media Co is at least 20%, the market value of Media Co's active assets of $500,000 is included in the Step 2 amount (calculated by multiplying the value of Media Co's active assets by Consulting Co's participation percentage in Media Co, that is, $1 million × 50%).
Big Co's assets are not included in the Step 2 amount as Karen is not a CGT concession stakeholder of Big Co.
The Step 2 amount is $1.48 million.
Step 3:
As the Step 2 amount is 92% of the Step 1 amount ($1.48 million ÷ $1.61 million) and noting there have been no significant changes to the activities or holdings of the relevant entities during the ownership period, Karen's shares meet the modified active asset test.
End of exampleCapital gains made before 8 February 2018
If you made a capital gain relating to shares in a company or an interest in a trust before 8 February 2018, there are fewer conditions you need to meet to be eligible.
You must meet the basic conditions and just before the CGT event you must either:
- be a CGT concession stakeholder in the company or trust
- meet the 90% test.
Next step:
See also:
If the CGT asset is a share in a company or an interest in a trust, you must meet additional conditions to be eligible for the small business CGT concessions.