Edited version of private advice

Authorisation Number: 1051547839651

Date of advice: 16 July 2019

Ruling

Subject: Capital gains tax small business concessions- significant individuals

Question

Are you considered to be a significant individual of the company for the purposes of the small business CGT concessions just before the CGT event?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

ABC Pty Ltd (the company) was incorporated in November 19XX.

D has been the sole director of the company since incorporation.

The share structure of the company is as follows:

In the 20XX-XX financial year the shareholders sold all shares in the company to an unrelated third party, resulting in a capital gain.

The Directors may from time to time divide the profits of the company among or declare and pay such dividend or interim dividend as they think fit to the holders of any class or classes of shares (as per clause XX of the Company Constitution).

Each Ordinary share, Class A share and Class B share confers on its holder the right to payment of any dividend determined to be paid on that class of shares by the Directors.

A dividend may be made to one or more class of shares or classes or shares to the exclusion of the shares of any other class or classes of shares (as per clause XX of the Company Constitution).

D has received at least 50% of the total of any dividends declared during any financial year during the period of his shareholding.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-10,

Income Tax Assessment Act 1997 section 152-55, and

Income Tax Assessment Act 1997 section 152-60.

Reasons for decision

Significant individual

As per section 152-60 of the ITAA 1997 an individual is a CGT concession stakeholder of a company if they are a significant individual or the spouse of a significant individual, where the spouse has a small business participation percentage in the company at that time that is greater than zero.

Under section 152-55 of the ITAA 1997 an individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. This 20% can be made up of direct and indirect percentages.

An entity's direct small business participation percentage in a company is the percentage of:

·  voting power that the entity is entitled to exercise

·  any dividend payment that the entity is entitled to receive

·  any capital distribution that the entity is entitled to receive, or

·  if they are different, the smallest of the three definitions above.

From incorporation until April 20XX, D held 100% of the shares in the company. Accordingly, D's small business participation percentage is 100% and D was a significant individual of the company in accordance with section 152-55 of the ITAA 1997 from November 19XX to April 20XX. However to satisfy the basic conditions under section 152-10 of the ITAA 1997 to apply the small business CGT concessions, the company must have a CGT concession stakeholder just before the CGT event.

As the period up to April 20XX is before the CGT event that occurred in the 20XX-XX financial year, we must consider if the company had a significant individual immediately before the CGT event happened.

After April 20XX, D continued to hold 100% of the ordinary shares in the company, however additional classes of shares in the company were issued. D owned 100% of the Class B shares and U acquired 100% of the Class B shares.

Each Ordinary share, Class A share and Class B share confers on its holder the right to payment of any dividend determined to be paid on that class of shares by the Directors. Clause XX of the Company Constitution provides that a dividend may be made to one or more class of shares or classes of shares to the exclusion of the shares of any other class or classes of shares.

Taxation Determination TD 2006/77 provides that all classes of shares must be taken into account in determining if a company has a significant individual. It follows that a shareholder that holds more than 20% of one class of shares in a company will not be a significant individual if their right to any distribution of income or capital from the company is dependent on a discretion to make distributions to any class of shares to the exclusion of the other classes of shares. A shareholder must be capable of receiving at least 20% of any distribution regardless of how a discretion is exercised.

TD 2006/77 provides the following example:

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.

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.

In this situation, Bedrock Co does not have a significant individual. There is no specific individual who has the right to receive at least 20% 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.

In this case, D holds Ordinary shares and Class A shares and U holds Class B shares. Clause XX of the Company Constitution provides that dividends may be made to any one or more class of share or classes of shares to the exclusion of the shares of any other class or classes of shares.

In accordance with TD 2006/77, after April 20XX, neither D nor U is a significant individual. Their small business participation percentage in the company is zero as their right to a distribution of income from the company is dependent on how the director exercised their discretion. There is no specific individual who has the right to receive at least 20% of any distribution the company may make.

While D is the sole Director and holds voting power to determine the final distribution of dividends, D may choose to distribute dividends to the other class of shareholder to the exclusion of Ordinary or Class A shareholders. The historical distribution of dividends is not taken into account when determining if a company had a significant individual at a point in time.

Accordingly, D was a significant individual for the period from incorporation to April 20XX. However from April 20XX, after the issue of the Class A and Class B shares, the company did not have any significant individual and therefore did not have a CGT concessions stakeholder immediately before the CGT event.