ATO Interpretative Decision
ATO ID 2003/811 (Withdrawn)
Income Tax
CGT small business concessions: controlling individual - share carrying discretionary dividend rightsFOI status: may be released
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This ATO ID is withdrawn as the ATO view on this matter is now reflected in the publication Advanced guide to capital gains tax concessions for small business.This document incorporates revisions made since original publication. View its history and amending notices, if applicable.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does a company have a 'controlling individual' under subsection 152-55(1) of the Income Tax Assessment Act 1997 (ITAA 1997) if an individual owns 50% of the A class shares which are the only class of shares on issue, apart from one D class share owned by another individual, in respect of which the directors can choose to pay a dividend?
Decision
No. Even though 50% of the A class shares are held by a particular individual, a company does not have a 'controlling individual' under subsection 152-55(1) of the ITAA 1997 if another type of share in respect of which the directors can choose to pay a dividend, is owned by another individual.
Facts
A company has on issue A class shares and one D class share. The A class shares have full voting and distribution rights. The D class share has dividend rights which are only payable at the discretion of the directors.
The D class share is owned by a key employee. A different individual owns 50% of the A class shares.
Reasons for Decision
Under subsection 152-55(1) of the ITAA 1997 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 capital that the company may make.
Therefore a company can have a 'controlling individual' only if it has an individual shareholder who holds shares that carry between them the right to receive at least 50% of any distribution the company may make.
In this situation, the individual that holds 50% of the A class shares may receive 50% of an income distribution if the directors' discretion to make part of the distribution to the D class shareholder is not exercised. However, they will receive less than 50% of the distribution if the discretion is exercised. Accordingly, they do not hold shares that carry between them the right to receive at least 50% of any distribution made. Their 'notional' 50% interest is reduced to below 50% by the existence of the discretion to distribute income to the D class shareholder.
In these circumstances, the company does not have a 'controlling individual' under subsection 152-55(1) of the ITAA 1997.
In any case, if there was potential to make a distribution on the D class share separate to any other distribution that might be made on the other shares, the company will also not have a controlling individual because the A class shareholder will not have the right to receive at least 50% of the potential D class distribution.
Date of decision: 14 August 2003Year of income: year ended 30 June 2004
Legislative References:
Income Tax Assessment Act 1997
subsection 152-55(1)
Keywords
Capital gains
CGT small business relief
Basic conditions for relief
Small business retirement exemption
Controlling individual test
ISSN: 1445-2782
| Date: | Version: | |
| 14 August 2003 | Original statement | |
| You are here | 11 March 2005 | Archived |