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

    To be eligible for the small business capital gains tax (CGT) concessions when the CGT asset is a share in a company or interest in a trust, you must meet:

    • 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.

    Step 1

    Just before the CGT event, either:

    Step 2

    You either:

    Step 3

    The company or trust must either:

    Step 4

    Your shares or interest must meet a 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 participation percentage directly or indirectly through one or more interposed entities. You work out the 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 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

    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:

    • voting power that the entity is entitled to exercise (except for jointly owned shares)
    • any dividend payment that the entity is entitled to receive
    • 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 in 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 example

    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
    • 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: Discretion 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 example

    Indirect 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.

    Diagram showing how to work out your small business participation percentage. ABC Trust pays Bill 15% of distributions, Jennifer (his spouse) 80% of distributions, and Nicky 5% of distributions.

    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:

    • 80% × 100% = 80%

    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:

    • 15% × 100% = 15%

    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:

    • 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

    As 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 the ABC Trust example (example 5):

    • 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 example

    Modified active asset test

    Follow these steps to determine whether you meet the modified active asset test.

    Step 1

    You must have owned the share or interest for at least:

    • 7½ years if you've owned it for more than 15 years
    • half of the time you have owned it, if you've owned it for 15 years or less.

    Step 2

    Work out the total market value of both:

    • the assets of the company or trust
    • the assets of any later entity in which you have a small business participation percentage, multiplied by that percentage.

    Step 3

    At least 80% of the total amount worked out in step 2 must be made up of:

    • active assets
    • cash or financial instruments that are inherently connected with a business carried on by the company or trust, or a later entity.

    This is called the 80% test.

    Step 4

    If the assets are held by a later entity, they are only active assets if both:

    Inherent connection

    Inherent connection requires more than just some form of connection between the cash or financial instrument and the business. Examples of things inherently connected to a business include:

    • when it is a permanent or characteristic attribute of the business, for example, goodwill, or trade debtors
    • excess funds the business has as a result of a temporary spike in trading activity or the sale of a business asset
    • a financial instrument that is inherently connected with a business that the owner of the financial instrument carries on, rather than any business a related entity carries on.

    Example 8: Loan to a related company

    Archimedes Pty Ltd carries on a manufacturing business. It lends $300,000 to a related company, Galileo Pty Ltd, to acquire various assets for use in the businesses of both companies.

    Although the loan is made between members of a corporate group as part of the overall financing of the group, it is not a permanent or characteristic attribute of the business (which is manufacturing, not the acquisition of assets).

    The loan is included in the step 2 calculation of the total market value of the assets, but not included as an active asset in step 3 (the 80% test).

    The market value of Archimedes Pty Ltd's active assets is $700,000 and the market value of all its assets (including the loan) is $1,000,000. The relevant calculation is:

    • $700,000 ÷ $1,000,000 = 70%

    The 80% test is not satisfied. Archimedes Pty Ltd would not be eligible to access the small business capital gains tax concessions for a capital gain it made relating to its shares in a company or interest in a trust.

    End of example

    Temporary breaches of 80% test

    The 80% test will be taken to have been met where the total market value of the active assets goes under 80% of the total market value of the company or trust, and:

    • this is only temporary in nature
    • it is reasonable to conclude that the 80% threshold has been passed.

    Although gains from depreciating assets may be treated as income rather than capital gains, depreciating assets, such as plant, are still CGT assets. They may, therefore, be active assets and included in the 80% test.

    Example 9: Temporary breach due to borrowing money

    John sells an active asset that meets the basic conditions and makes a capital gain of $500,000. He acquires shares in Fruit and Veg Co, which runs his family business, as replacement assets. The shares meet the 80% test and, as a result, are active assets.

    Sometime later, Fruit and Veg Co borrows money to pay a dividend, and fails the 80% test. Two weeks later they pay the dividend and the shares pass the 80% test again. For the interim two weeks the shares are treated as active assets, even though they do not pass the 80% test.

    End of example

    Capital 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:

    Last modified: 05 Oct 2018QC 52283