Taxation Determination
TD 2006/77
Income tax: capital gains: are all classes of shares (other than redeemable shares) issued by a company taken into account in determining if the company has a significant individual under section 152-55 of the Income Tax Assessment Act 1997?
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This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, we must apply the law to you in the way set out in the ruling (or in a way that is more favourable for you if we are satisfied that the ruling is incorrect and disadvantages you, and we are not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. |
Ruling
1. Yes. All classes of shares (other than redeemable shares) issued by a company are taken into account in determining if the company has a controlling individual under subsection 152-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997).
Example 1
2. Bedrock Co 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 proportions by Fred and Barney and the B class shares being held in equal proportions by their respective wives, Wilma and Betty.
3. The directors of Bedrock Co 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.
4. In this situation, Bedrock Co 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 2
5. 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.
6. In this situation, the company does have a controlling individual. Isaac holds 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 3
7. A company has A class shares and 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.
8. 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 a 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.
Example 4
9. XYZ Co has 100 ordinary shares and 1 redeemable preference share on issue. Michelle and ABC Co each own 50 ordinary shares. Catherine owns the redeemable preference share.
10. The redeemable preference share has voting rights equal to the ordinary shares, preferential dividend rights, a return of capital right but no right to participate in surplus capital on winding up. The ordinary shares have voting rights, dividend rights and rights to participate in surplus capital on winding up.
11. In this situation, the redeemable preference share is ignored for the purpose of determining if XYZ Co has a controlling individual. Accordingly, as Michelle holds shares that carry between them the right to exercise at least 50% of the voting power in the company and receive at least 50% of any distribution the company may make (excluding redeemable shares), she is a controlling individual of XYZ Co.
Date of effect
12. This Determination applies to years commencing both before and after its date of issue. However, it does not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of the determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).
Commissioner of Taxation
20 December 2006
Appendix 1 - Explanation
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This Appendix is provided as information to help you understand how the Commissioner's view has been reached. It does not form part of the binding public ruling.
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Explanation
13. An individual is a 'controlling individual' of a company if they hold the legal and equitable interests in shares (other than 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 any distribution of capital that the company may make (subsection 152-55(1) of the ITAA 1997).
14. The 'controlling individual' definition requires the interests in the shares to be held directly by an individual. Therefore, if a company has no individual shareholders, for example, if all the shareholders are trusts or companies, the company does not have a controlling individual. As well, if any individual holds interests in a company indirectly through one or more interposed entities, those indirect interests are ignored in determining whether that individual is a controlling individual.
15. Therefore for a company to have a 'controlling individual', an individual must hold direct interests in the company.
16. If a company has more than one class of shares (other than redeemable shares), all classes must be taken into account in determining if the company has a controlling individual. The fact that an individual holds 50% of one class of shares will not be sufficient if the directors have the discretion to make distributions of income or capital to any class of shares to the exclusion of the other classes of shares. Rather, an individual shareholder must be capable of receiving at least 50% of any distribution made regardless of how the directors exercise their discretion.
Note
17. As noted in the Treasurer's Press Release No. 38 of 2006 (9 May 2006), the Board of Taxation's report on its Post-Implementation Review of the small business CGT concessions contains a number of legislative recommendations. This Taxation Determination may be affected when the new significant individual 20% test is enacted.
Previously issued as TD 2006/D22
References
ATO references:
NO 2006/8991
Related Rulings/Determinations:
TR 2006/10
Subject References:
basic conditions for relief
capital gains
capital gains tax
CGT small business relief
controlling individual
controlling individual test
Legislative References:
TAA 1953
ITAA 1997 152-55(1)
| Date: | Version: | Change: | |
| You are here | 20 December 2006 | Original ruling | |
| 19 December 2012 | Consolidated ruling | Addendum |