• Controlling individual test

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    If your CGT asset is a share in a company or an interest in a trust, the company or trust must satisfy the controlling individual test for you to qualify for any of the concessions. As well, some of the concessions require a company or trust to have a controlling individual regardless of the type of CGT asset involved.

    A company or trust satisfies the controlling individual test if it had at least one controlling individual just before the CGT event. The small business 15-year exemption further requires a company or trust to have a controlling individual for the entire period of ownership of the CGT asset.

    Attention

    The controlling 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 $5 million maximum net asset value test.

    End of attention

    Meaning of controlling individual

    The following section explains who is a controlling individual for a company, fixed trust and a discretionary trust.

    Companies

    An individual is a controlling individual of a company if the individual holds legal and equitable interests in shares (apart from redeemable shares) that carry between them:

    • the right to exercise at least 50% of the voting power in the company, and
    • the right to receive at least 50% of any distribution of income and capital that the company may make.

    Example

    Joe owns shares carrying 60% of the voting and distribution rights in Company X. Joe is a controlling individual of the company. If Joe actually owned 50% and his wife Anne owned 50%, they would both be controlling individuals of the company.

    Alternatively, if Joe and Anne owned 40% each and their daughter Clare owned the remaining 20% there would be no controlling individuals and the company would not satisfy the controlling individual test.

    If a company has no individual shareholders, for example, if all the shareholders are trusts or companies, it does not have a controlling individual.

    If an individual holds interests in a company indirectly through one or more interposed entities, the controlling individual requirement is not satisfied.

    Example

    Operating Co carries on business. Holding Co holds 100% of the shares in Operating Co. Frank owns 100% of the shares in Holding Co.

    Operating Co does not have a controlling individual. This is because no individual holds the legal and equitable interests in shares that carry the right to exercise at least 50% of the voting power and receive at least 50% of any income or capital distributions.

    Different share classes

    If a company has different share classes, all classes must be taken into account (apart from redeemable shares) to determine if the company has a controlling individual. As the following examples illustrate, the existence of a directors' discretion to distribute to one class of shares instead of another is likely to critically affect whether the company has a controlling individual.

    Example

    A company has two different classes of shares, A and B, which have equal distribution rights. Only the A class shares have voting rights. Each class of shares is held by different shareholders - the A class shares being held in equal proportion by Fred and Barney and the B class shares being held in equal proportion by their respective wives, Wilma and Betty.

    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. There is the possibility of any of the shareholders receiving 50% of a distribution from the company, depending on the exercise of the directors' discretion.

    In this situation, the company does not have a controlling individual. There is no specific individual who holds shares that carry between them the right to receive at least 50% of any distribution the company may make. Fred and Barney (who each hold 50% of the voting power) might receive 50% of a distribution or they might not receive anything at all, depending on how the directors exercise their discretion.

    Example

    A company has two different classes of shares, A and B, which have equal voting and distribution rights. Isaac holds 50% 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 controlling individual. As Isaac holds 50% of the shares of each class, he can exercise at least 50% of the voting power and, regardless of how the directors' discretion is exercised, Isaac will always receive 50% of any distribution made by the company.

    Example

    A company has only A class shares apart from one D class share issued to a key employee. Gus holds 50% of the A class shares which have full voting and distribution rights. The D class share has dividend rights only payable at the discretion of the directors.

    In this situation, the company does not have a controlling individual. Gus may receive 50% of a distribution if the directors do not exercise their discretion to make part of the distribution to the D class shareholder, but he will receive less than 50% of the distribution if the discretion is exercised. That is, Gus does not hold shares that carry between them the right to receive at least 50% of any distribution made. His 'notional' 50% interest is reduced to below 50% because of the directors' ability to make distributions to the D class shareholder.

    Fixed trusts

    An individual is a controlling individual of a fixed trust (for example, a unit trust) if the individual is beneficially entitled to at least 50% of the income and capital of the trust.

    If a fixed trust has no individual beneficiaries (for example, if all the beneficiaries are trusts or companies) it does not have a controlling individual.

    If an individual holds interests in a fixed trust indirectly through one or more interposed companies or trusts, the controlling individual requirement is not satisfied.

    Example

    A unit trust carries on a business. There are two unit holders that are discretionary trusts, each being entitled to 50% of the income and capital of the unit trust. Each of the discretionary trusts has individual beneficiaries.

    In this situation, the unit trust does not have a controlling individual because it has no individual beneficiaries and, accordingly, does not satisfy the controlling individual test. It is therefore not eligible for the small business 15-year exemption or the small business retirement exemption.

    The unit trust may be eligible for the small business 50% active asset reduction and the small business rollover if the other conditions are satisfied.

    Discretionary trusts

    An individual is a controlling individual of a discretionary trust during an income year if:

    • the trust made a distribution of income or capital, or both, during that year, and
    • the individual was beneficially entitled to at least 50% of the total income distributions and at least 50% of the total capital distributions made by the trust in that year.

    If a discretionary trust did not make any distributions of income or capital during an income year, the trust would not have a controlling individual for that year, and therefore would not satisfy the controlling individual test.

    However, for the purposes of the small business 15-year exemption only, the requirement that there be a controlling individual for the whole of a particular ownership period does not apply for an income year in which a discretionary trust did not make a distribution of income or capital if the trust had a tax loss for that income year. But there must still be a controlling individual just before the CGT event.

    Meaning of CGT concession stakeholder

    If your CGT asset is a share in a company or an interest in a trust, you must also be a CGT concession stakeholder of the company or trust to qualify for any of the concessions.

    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.

    To be a CGT concession stakeholder of a company or trust you must be:

    • a controlling individual of the company or trust, or
    • a spouse of a controlling individual if
      • for a company, the spouse holds legal and equitable interests in any amount of shares in the company
      • for a fixed trust such as a unit trust, the spouse is beneficially entitled to any of the income or capital of the trust, or
      • for a discretionary trust, during the income year the trust made a distribution of income or capital to which the spouse was beneficially entitled.
       

    A company or trust will have two, one or no CGT concession stakeholders. It will not have a CGT concession stakeholder if it does not have a controlling individual. For example, in the case of three brothers having equal interests in a company or trust, there are no CGT concession stakeholders because there are no controlling individuals.

    Example

    There are 100 issued shares in Company X, all with equal voting and distribution rights. Joe owns 99 shares and his wife Anne owns one share. Joe is a controlling individual of the company and, because Anne is his spouse and owns a share in the company, they are both CGT concession stakeholders. Anne and Joe may be entitled to the small business concessions when they sell their shares.

    Last modified: 10 Sep 2007QC 27357