Edited version of private advice

Authorisation Number: 1052249503799

Date of advice: 8 May 2024

Ruling

Subject:CGT concessions - significant individual

Question

Can the Company have a significant individual under section 152-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Company is governed by a Shareholders' Agreement, which was entered into between the Company and its shareholders in 20XX.

The Shareholders' Agreement refers to the 'Replaceable Rules' as its constitution. The replaceable rules apply, with the Shareholders Agreement taking precedence over the replaceable rules.

The Company has three classes of shares on issue, Class A, Class B and Class C.

Shareholder A holds 100% of the A Class shares and is entitled to 51% of the votes and 100% of any dividends declared in favour of the A Class shares.

Shareholder B holds 100% of the B Class shares and is entitled to 24.5% of the votes and 100% of any dividends declared in favour of the B Class shares.

Shareholder C holds 100% of the C Class shares and is entitled to 24.5% of the votes and 100% of any dividends declared in favour of the C Class shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-60

Income Tax Assessment Act 1997 section 152-70

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless stated otherwise.

Summary

The Company cannot not have a significant individual under section 152-55 of the ITAA 1997.

Detailed reasoning

Significant Individual

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

CGT Concessional Stakeholder

Section 152-60 explains an individual is a CGT concession stakeholder of a company or trust at a time if the individual is:

(a)          a significant individual in the company or trust; or

(b)          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 that is greater than zero.

Small business participation percentage

Section 152-70 states an entity's direct SBPP in a company is the percentage of:

•         the voting power the entity has in the company

•         their entitlement to any dividend payment made by the company

•         their entitlement to any capital distribution the company may make, or

if they are different, the smallest of the three points above.

Tax 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? 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 at paragraphs 2 to 4 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.

Application to your circumstances

No individual has a direct or indirect small business participation percentage in all of the classes of shares that are on issue in the Company. Therefore, based on the facts in this case the Company cannot not have a significant individual.