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Edited version of private ruling
Authorisation Number: 1011609013628
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Ruling
Are the indirect shareholders of Company A still significant individuals as defined in section 152-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
Company A was formed sometime in 1994. Company A has operated the same business continuously since it commenced trading.
Company A had two shareholders at the time of formation, X and Y. Each shareholder held one share each. X and Y continued as shareholders until sometime in 2001.
Company B was formed sometime in 2001. X and Y are the shareholders of Company B.
Sometime in 2001 the shares held by X and Y in Company A were transferred to Company B. The shares were transferred pursuant to a scheme to reorganise the affairs of Company A in which the interposed entity Company B was created.
The parties elected for the rollover in Subdivision 124-G of the ITAA 1997 to apply to the transfer. Company B is now the sole shareholder of Company A.
The shares in Company A and Company B are of the same class and carry the same voting rights and entitlements to distributions.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 152
Income Tax Assessment Act 1997 Section 152-55
Income Tax Assessment Act 1997 Section 152-65
Income Tax Assessment Act 1997 Subsection 152-70(1)
Income Tax Assessment Act 1997 Section 152-75
Does Part IVA apply to this ruling?
Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.
We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.
If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.
For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.
Reasons for decision
Summary
The indirect shareholders of Company A are still significant individuals of Company A as defined in section 152-55 of the ITAA 1997.
Detailed reasoning
A capital gain may be reduced or disregarded under the small business concessions contained in Division 152 of the ITAA 1997 if certain conditions are satisfied.
There are four small business capital gains tax (CGT) concessions available.
There are several conditions that are common to all the concessions that must be satisfied - the basic conditions. Each concession also has further requirements that must be satisfied.
One of the requirements prescribed in Division 152 of the ITAA 1997 is that an entity must have had a significant individual at a particular time.
An individual can be a significant individual in a company either directly or indirectly through one or more interposed entities.
An individual is a significant individual in a company if, at that time, the individual has a small business participation percentage in the company of at least 20%: section 152-55 of the ITAA 1997.
An entity's small business participation percentage in another entity at a time is the sum of the entity's direct small business participation percentage in the other entity at that time; and the entity's indirect small business participation percentage in the other entity at that time: section 152-65 of the ITAA 1997.
An entity's direct small business participation percentage in a company is the percentage of voting power that the entity is entitled to exercise, or any dividend payment that the entity is entitled to receive, or any capital distribution that the entity is entitled to receive: subsection 152-70(1) of the ITAA 1997.
An entity's indirect small business participation percentage in a company is calculated by multiplying together the entity's direct participation percentage in an interposed entity, and the interposed entity's total participation percentage (both direct and indirect) in the company: section 152-75 of the ITAA 1997.
Application to the taxpayer's circumstances
Company A had two shareholders, X and Y, from the time of its formation to the time of its reorganisation. Each shareholder held one share each.
Pursuant to a scheme to reorganise its affairs in which an interposed entity was created, Company A now has one shareholder, Company B.
X and Y are the shareholders of Company B. Each shareholder holds one share each.
The shares in Company A and Company B are of the same class and carry the same voting rights and entitlements to distributions.
In accordance with subsection 152-70(1) of the ITAA 1997, X and Y each had a small business participation percentage in Company A of 50% each from the time of its formation to the time of its reorganisation and in accordance with section 152-55 of the ITAA 1997 were Company A's significant individuals.
Since Company A's reorganisation, X and Y do not have a direct small business participation percentage in Company A. Company B has a direct small business participation percentage in Company A of 100% and X and Y have a direct small business participation percentage of 50% each in the interposed entity Company B.
In accordance with section 152-75 of the ITAA 1997, to find each of X and Y's indirect small business participation percentage in Company A, we multiply together their direct participation in Company B with Company B's direct participation percentage in Company A. That is, 50% x 100% = 50%.
In accordance with section 152-65 of the ITAA 1997, X and Y's small business participation percentage in Company A will be the sum of their direct small business participation percentage in Company A (nil) and their indirect small business participation percentage in Company A (50% each).
As X and Y each have a small business participation percentage in Company A greater than 20%, they are still the significant individuals of Company A for the purposes of section 152-55 of the ITAA 1997.