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Ruling

Subject: Capital gains tax (CGT) small business concessions - basic conditions - significant individual - CGT concession stakeholder

1. Were you a significant individual in a company as defined in section 152-55 of the Income Tax Assessment Act 1997 (ITAA 1997) just before the CGT event happened for the company?

Yes.

2. Were you a CGT concession stakeholder in Company as defined in section 152-60 of the ITAA 1997 just before the CGT event happened for Company?

Yes.

3. Were you a significant individual in the unit trust just before the CGT event happened for the company?

No.

4. Were you a CGT concession stakeholder in the unit trust just before the CGT event happened for the Company?

No.

5. Were you able to satisfy the conditions to make you either a significant individual or a CGT concession stakeholder in Unit Trust in some other way, because you and your spouse together had a small business participation percentage in Unit Trust exceeding 20%?

No.

6. If Company was not entitled to the small business 50% reduction in respect of the disposal of units in Unit Trust, were you entitled to it under Subdivisions 152-A and/or 152-C of the ITAA 1997?

No.

This ruling applies for the following period:

Year ended 30 June 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it.

You and your spouse each held shares in Company, such that each of you had a small business participation percentage in Company exceeding 20%.

The result was that you and your spouse together had a small business participation percentage in Company exceeding 40%.

Just before the CGT event, Company had a small business participation percentage in Unit Trust exceeding 20%.

As a result, just before the CGT event you and your spouse each had an indirect small business participation percentage in Unit Trust. However, the indirect small business participation percentage held by each of you was less than 20%.

Neither of you held a direct small business participation percentage in Unit Trust just before the CGT event.

A CGT event happened when Company disposed of units it held in Unit Trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 152-A.

Income Tax Assessment Act 1997 Subdivision 152-C.

Income Tax Assessment Act 1997 section 152-55.

Income Tax Assessment Act 1997 section 152-60.

Income Tax Assessment Act 1997 paragraph 152-60(a).

Income Tax Assessment Act 1997 paragraph 152-60(b).

Income Tax Assessment Act 1997 section 152-65.

Income Tax Assessment Act 1997 section 152-75.

Reasons for decision

Question 1

Summary

You satisfied the definition in section 152-55 of the ITAA 1997 and so were a significant individual in Company.

Detailed reasoning

The relevant wording in the definition of significant individual at section 152-55 of the ITAA 1997 states that:

An individual is a significant individual in a company or a trust at a time if, at that time, the individual has a *small business participation percentage in the company or trust of at least 20%.[*denotes a defined term]

You correctly state that just before the CGT event you had a small business participation percentage in Company exceeding 20%. As your small business participation percentage was at least 20%, you were a significant individual in Company just before the CGT event.

Question 2

Summary

As you state, you satisfied the definition in section 152-60 of the ITAA 1997 and so were a CGT concession stakeholder in Company.

Detailed reasoning

A CGT concession stakeholder is defined at section 152-60 of the ITAA 1997 as follows:

An individual is a CGT concession stakeholder of a company or a trust at a time if the individual is:

a *significant individual in the company or trust; or

a spouse of a significant individual in the company or trust, if the spouse has a *small business participation percentage in the company or trust at that time….
[* denotes a defined term]

We stated above that you were a significant individual in Company just before the CGT event. Therefore as stated by you, paragraph 152-60(a) of the ITAA 1997 applied to make you a CGT concession stakeholder in Company just before the CGT event.

Question 3 and 4

Summary

You were neither, because both your small business participation percentage in Unit Trust, and that of your spouse, was less than 20%.

Detailed reasoning

You did not hold any units in Unit Trust so you did not have a 'direct small business participation percentage' in it. However, you argue correctly that you did have a small business participation percentage in Unit Trust, because you held an 'indirect small business participation percentage' in it, as set out by sections 152-65 and 152-75 of the ITAA 1997.

Your indirect small business participation percentage in the Unit Trust arose because you held an interest in Company, which in turn held an interest in Unit Trust.

Therefore, you may have been a significant individual in Unit Trust and/or a CGT concession stakeholder in it, if you held the required indirect small business participation percentage.

Just before the CGT event, Company had a direct small business participation percentage in Unit Trust exceeding 20%. As a result of having your direct small business participation percentage in Company just before the CGT event, you correctly state that you had an indirect small business participation percentage in Unit Trust. But this was less than 20% at that time. As a consequence, you did not satisfy the definition of significant individual at section 152-55 of the ITAA 1997, with respect to Unit Trust. You were not a significant individual in Unit Trust just before the CGT event.

As you were not a significant individual in Unit Trust, you did not satisfy the first definition of CGT concession stakeholder with respect to the trust, which is that you be a significant individual (paragraph 152-60(a) of the ITAA 1997). The alternative definition of CGT concession stakeholder at paragraph 152-60(b) of the ITAA 1997 would have been satisfied if you had a small business participation percentage in Unit Trust greater than zero, and your spouse was a significant individual in Unit Trust. As shown you did have a real small business participation percentage in the trust. Your spouse also had a small business participation percentage in Unit Trust. But it also was less than 20%. Therefore, for the reasons already given regarding you, your spouse was not a significant individual in the trust. Thus you failed to satisfy the definition of a CGT concession stakeholder in the trust as set out in paragraph 152-60(b) of the ITAA 1997.

For these reasons, you were neither a significant individual nor a CGT concession stakeholder in Unit Trust just before the CGT event.

Question 5

Summary

No. When the terms significant individual and small business participation percentage were introduced, together with associated changes to the definition of CGT concession stakeholder, the total combined interests of family members, of itself, was rejected as a test for the new definitions. No other mechanism is available to you.

Detailed reasoning

You argued that because you and your spouse together have a small business participation percentage of at least 20% in Unit Trust, you should be treated as a CGT concession stakeholder of the trust.

The wording of section 152-55 of the ITAA 1997 about a significant individual, looks at the circumstances of an individual independently of those of any others, and uses only the small business participation percentage of that individual. While that can be an indirect small business participation percentage, it remains the participation percentage of that individual only, as it flows through interposed entities. It is considered independently of the small business participation percentage of another individual, direct or indirect, in any entities.

The same situation applies to the wording of paragraph section 152-60(a) of the ITAA 1997 when defining a CGT concession stakeholder. That paragraph states that an individual who is a significant individual is also a CGT concession stakeholder. It considers the status of that individual independently of those of any others.

The only interaction connecting the small business participation percentages of individuals occurs in paragraph 152-60(b) of the ITAA 1997, where an individual may be a CGT concession stakeholder in a company or trust, and have a small business participation percentage less than 20%, if their spouse is a significant individual in the relevant company or trust. In these circumstances a CGT concession stakeholder in a trust, for example, may be an individual who is not a significant individual in the trust. In effect such a CGT concession stakeholder has that status due to the small business participation percentage of their spouse, and in that situation, together the two would always hold a small business participation percentage greater than 20% in the relevant trust. However, the CGT concession stakeholder definition is not satisfied simply because of the small business participation percentage that they hold together. It is satisfied because two conditions are met:

· The individual who is CGT concession stakeholder has a small business participation percentage greater than zero in the relevant trust; and

· Their spouse is a significant individual in the relevant trust; that is, the spouse must have a small business participation percentage of at least 20%.

As neither you nor your spouse was a significant individual in Unit Trust, you were not a CGT concession stakeholder in the trust. This interpretation is supported by the Explanatory Memorandum (EM) to the Tax Laws Amendment (2006 Measures No. 7) Act 2007 which introduced the term significant individual, and the current definition of CGT concession stakeholder. The Regulation Impact Statement - for the significant individual test, contained in the EM clearly shows that the amendments made in 2007 were not intended to allow the combined interests alone of family members to be a test or to form an additional definition:

Summary of regulation impact statement - for the significant individual test

Regulation impact on business

Main points:

· This measure will increase the number of individuals who will be able to access the small business concessions because of the reduced [sic] participation percentage of 50 per cent (controlling individual test) to 20 per cent (significant individual test).

· Further, access to the concessions is increased as the 50 per cent test was based on direct ownership of interests in a company or trust, whereas the new 20 per cent test incorporates both direct and indirect ownership of such interests….

REGULATION IMPACT STATEMENT - for the significant individual test

Implementation options

Option 1: replacing the current controlling individual test with a (new) significant individual test (direct ownership only, as at present)

1.112 This option is to replace the current controlling individual (50 per cent) test with a significant individual test, with a reduced percentage interest of:

a) 33 per cent …;

b) 25 per cent...;

c) 20 per cent …

Option 2: replacing the current controlling individual test with a (new) significant stake test (direct or indirect ownership)

1.113 Same as above (Options (a) to (d)) except that the test would also allow the relevant percentage of ownership to be satisfied either directly or indirectly through one or more interposed entities, rather than just through direct ownership as under the controlling individual test.

Option 3: combining the interests of close family members

1.114 Another option is to allow the existing controlling individual test to be satisfied by combining the interests of close family members...

Analysis of the costs and benefits associated with each implementation option

...

Option 2

1.118 Amending the percentage requirements would enable some small businesses run through a company or trust to access the concessions even if they do not currently have a controlling individual …

1.119 In addition, allowing the significant individual test to be satisfied either directly or indirectly through one or more interposed entities (rather than just through direct ownership as at present) would have the advantage of assessing the real economic interest that individuals have in a small business, rather than just their direct interest.

1.120 Currently, some small businesses are excluded from the concessions because of a tiered ownership structure. For example, a business structure that has an individual with a 100 per cent stake in a discretionary trust which has a 100 per cent stake in a unit trust or company, does not have a controlling individual…

Option 3

1.121 Allowing the controlling individual test to be satisfied by combining the interests of close family members would have the effect of allowing more small business taxpayers to access the small business CGT concessions; however a number of complications would arise.

It would be necessary to determine what would constitute family interests for the purpose of the test, for example, spouses, children, only dependent children, ….

It would also be necessary to determine which family member would be the controlling individual on the basis of the aggregated family interest. This would be especially difficult ....

Conclusion and recommended option

1.127 Option 2c (replacing the controlling individual test with a significant individual test with a requirement of a 20 per cent interest and allowing the requirement to be satisfied either directly or indirectly) is preferred.

Therefore, there was no way in which you could satisfy the conditions to make you either a significant individual or a CGT concession stakeholder in Unit Trust.

Question 5

Summary

There was no mechanism for the small business 50% reduction to be granted to you in any of your possible capacities where Company was not eligible.

Detailed reasoning

In a separate decision we decided that Company was not entitled to the small business 50% reduction in respect of the disposal of units in Unit Trust.

The CGT small business 50% reduction was (and is) only available to the taxpayer which made a capital gain, and also satisfied all the necessary conditions for the reduction. There was no mechanism for the small business 50% reduction to be granted to other entities where a company was not entitled to it. Thus, it cannot and could not be used by a shareholder, significant individual or CGT concession stakeholder in Company. Therefore, it could not have been used by you where it was not available to Company even if you had been a significant individual or CGT concession stakeholder in Unit Trust.

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