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  • Extra conditions if the CGT asset is a share or trust interest

    If the CGT asset is a share in a company or an interest in a trust, one of these additional basic conditions must be satisfied just before the CGT event:

    • the entity claiming the concession must be a CGT concession stakeholder in the company or trust, or
    • CGT concession stakeholders in the company or trust together have a small business participation percentage in the entity claiming the concession of at least 90% (the 90% test).

    CGT concession stakeholder

    An individual is a CGT concession stakeholder of a company or trust if they are a significant individual or the spouse of a significant individual where the spouse has a small business participation percentage in the company or trust at that time that is greater than zero.

    This participation percentage can be held directly or indirectly through one or more interposed entities.

    The percentages are worked out in the same way as for the significant individual test.

    Example

    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. Anne is Joe’s spouse and, because she owns a share in the company, she 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 example

    If 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

    An individual is a significant individual in a company or trust if they 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 satisfies the significant individual test if it had at least one significant individual just before the CGT event. The small business 15-year exemption further requires a company or trust to have a significant individual for periods totalling at least 15 of the years of ownership of the CGT asset.

    The significant individual test is not the same as the control tests used to determine if an entity is ‘connected with’ another entity for the purposes of the $6 million maximum net asset value test or the $2 million aggregated turnover test.

    An entity’s small business participation percentage in another entity at a time is the percentage that is the sum of:

    Direct small business participation percentage

    Companies

    An entity’s direct small business participation percentage in a company is the percentage of:

    • voting power that the entity is entitled to exercise (except for jointly owned shares) or
    • any dividend payment that the entity is entitled to receive, or
    • any capital distribution that the entity is entitled to receive, or
    • if they are different, the smallest of the three percentages above.

    All classes of shares (other than redeemable shares) are taken into account in determining an entity’s participation percentage in a company.

    Example

    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% because although she is entitled to 30% of dividends and capital distributions, her percentage in the voting rights is nil and she must use the smallest percentage to calculate her small business participation percentage.

    End of example

     

    Example

    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.

    In this situation, the company does have a significant individual. Isaac holds 20% of the voting power and, regardless of how the directors' discretion is exercised, Isaac will always receive 20% of any distribution made by the company.

    However, if Isaac only held the class A shares and no class B shares, he would not be a significant individual. His right to receive the distribution is only notional, and dependent on how the directors exercise their discretion to make distributions.

    End of example
    Jointly owned shares

    The voting power calculation is ignored where the shares are jointly owned, as neither owner would individually control the voting power on the jointly owned shares.

    Trusts

    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, or
    • 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 percentage of:

    • 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, or
    • if two different percentages apply, then the smaller of the two.
    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, the trustee of the trust:

    • did not make a distribution of income or capital during the income year, and
    • had no net income or had a tax loss for income year.

    The entity's direct small business participation percentage at the relevant time is worked out using the percentage of the distributions the entity was beneficially entitled to in the last income year before the CGT event year in which the trustee made a distribution.

    An entity's small business participation percentage is zero if:

    • the trust had net income and did not have a tax loss, and the trustee decided not to distribute, or
    • 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

    XYZ trust is a trust where entities do not 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 an asset and makes a capital gain. The trustee wants to exempt the capital gain under the small business 15 year exemption. One of the requirements is that the trust must have a significant individual (not necessarily the same individual) for at least 15 years.

    XYZ trust has a tax loss and has made no distributions in the CGT event year. The trustee made a distribution of income in the year prior to the CGT event year, and in all the previous years except the income year 14 years before the CGT event year. The distributions made in that immediate prior year can be used to work out the small business participation percentages of Evan, Mario, Denise and Katrina for the CGT event year, and for the earlier year that the trustee was not able to make any distributions because the trust had no net income. These amendments allow the XYZ trust to satisfy the significant individual requirement, and if the other conditions are met, the trustee can disregard the capital gain under the small business 15 year exemption.

    End of example

    Indirect small business participation percentage

    An entity’s indirect small business participation percentage in a company or trust is calculated by multiplying together the entity’s direct participation percentage in an interposed entity, and the interposed entity’s total participation percentage (both direct and indirect) in the company or trust.

    Example

    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.

    Diagram showing how to work out your small business participation percentage

    Jennifer receives 80% of the distributions from ABC Trust, therefore, she has a direct participation percentage of 80% in ABC Trust.

    To find Jennifer’s participation percentage in Operating Co, multiply Jennifer’s direct participation percentage in ABC Trust and ABC Trust’s total participation percentage in Operating Co.

    80% × 100% = 80%

    Jennifer has an 80% participation percentage in Operating Co, so she is a significant individual of Operating Co.

    Jennifer's spouse, Bill, received 15% of the distributions from ABC Trust, therefore, he has a direct participation percentage of 15% in ABC Trust.

    To find Bill’s participation percentage in Operating Co, multiply Bill’s direct participation percentage in ABC Trust and ABC Trust’s total participation percentage in Operating Co.

    15% × 100% = 15%

    Bill has a 15% participation percentage in Operating Co, so he is not a significant individual of Operating Co.

    (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 receives 5% of the distributions from ABC Trust, therefore, she has a direct participation percentage of 5% in ABC Trust.

    To find Nicky’s participation percentage in Operating Co, multiply Nicky’s direct participation percentage in ABC Trust and ABC Trust’s total participation percentage in Operating Co.

    5% × 100% = 5%

    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 example

    An indirect interest can be held through one or more interposed entities.

    An object of a discretionary trust (where entities do not have entitlements to all of the income and capital of the trust) may calculate their indirect small business participation percentage to be more than zero, where the trust had a tax loss or no net income for the income year.

    For more information, see Discretionary trusts with tax losses or no net income.

    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 satisfies the test if small business participation percentages in that entity totalling at least 90% are held by CGT concession stakeholders of the company or trust in which the shares or interests are held.

    As with the significant individual test, the participation percentage can be held directly or indirectly through multiple interposed entities.

    Example

    Catherine owns 80% of a private company.

    • The private company provides 90% of its distributions to a discretionary trust.
    • The discretionary trust owns 60% of a unit trust.

    The discretionary trust sells the units in the unit trust.

    Catherine, a significant individual and a CGT concession stakeholder of the unit trust, has a 72% participation percentage in discretionary trust.

    80% × 90% = 72%

    If the other interests in Discretionary Trust are held by people who are not CGT concession stakeholders, Discretionary Trust will not satisfy the ownership requirement and will not be able to access the concessions.

    End of example

     

    Example

    Based on the ABC Trust example:

    • 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. 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

    A discretionary trust sells shares in an operating company. Anna receives 90% of the distributions from the trust, and the trust has a 50% interest in the company.

    The trust cannot be a CGT concession stakeholder in the company because it is not an individual.

    However, Anna will be a CGT concession stakeholder in the company if she (or her spouse) has a direct or indirect interest in the company of at least 20%. She, together with other CGT concession stakeholders, must also have a combined interest in the trust of at least 90%.

    The 90% test is satisfied because Anna’s indirect interest in the company is 45% (50% of 90%). Therefore, she is a CGT concession stakeholder in the company and her interest in the trust is 90%.

    End of example

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    Last modified: 17 Jul 2017QC 52283