Edited version of private advice

Authorisation Number: 1052266927428

Date of advice: 25 July 2024

Ruling

Subject: CGT - basic conditions - significant individual

Question

Is person X a significant individual of Entity A under the definition in section 152-55 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes. Person X is a significant individual of Entity A under the definition in section 152-55 of the ITAA 1997. This is because person X has a small business participation percentage in Entity A of at least 20%.

This ruling applies for the following period:

X of X 20XX to X of X 20XX

Relevant facts and circumstances

Entity A sold a business that it had owned.

Entity A is a unit trust. Entity A is wholly owned by Entity B, a trustee for Entity C.

Entity C is a discretionary family trust.

During the 20XX financial year, entity C distributed 100% of its trust income to Entity D.

Entity D, at the date of its incorporation, issued 50% of its shares to Entity C with the remaining shares being issued to Entity E, a trustee for Entity F. No further shares of any class have been issued since the date of incorporation.

Entity F is a discretionary family trust.

Entity F resolved to distribute 100% of its trust income to person X.

Entity C resolved to distribute 100% of its trust income to Person Y and Person X in equal portions.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 152-55

Income Tax Assessment Act 1997 section 152-65

Income Tax Assessment Act 1997 section 152-70

Income Tax Assessment Act 1997 section 152-75

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA 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 applies, we will 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, go to our website 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

Section 152-55 of the Income Tax Assessment Act (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%.

An entity's small business participation percentage in another entity at a time is the percentage that is the sum of:

a)    the entity's direct small business participation percentage in the other entity at that time; and

b)    the entity's indirect small business participation percentage in the other entity at that time. (152-65 ITAA 1997)

Subsection 152-70(1) tells us how to find the direct small business participation percentage for both trusts and companies. Under this subsection, an entity holds a direct small business participation percentage at the relevant time in a trust where entities do have entitlements to all the income and capital of the trust that is equal to:

a)    the percentage of any distribution of income that the trustee may make to which the entity would be beneficially entitled to; or

b)    the percentage of any distribution of capital that the trustee may make to which the entity would be beneficially entitled to.

Additionally, in a trust where entities do not have entitlements to all the income and capital of the trust, the direct small participation percentage is equal to:

a)    if the trustee makes distributions of income during the income year in which that time occurs - the percentage of the distributions to which the entity was beneficially entitled; or

b)    if the if the trustee makes distributions of capital during the relevant year - the percentage of the distributions to which the entity was beneficially entitled.

Under section 152-75 of the ITAA 1997, the indirect small business participation percentage that an entity holds at a particular time in another entity is worked out by multiplying:

a)    The holding entity's direct small business participation percentage in another entity at that time; by

b)    The sum of:

                      i.        The intermediate entity's direct small business participation percentage in the test entity at the time; and

                     ii.        The intermediate entity's indirect small business participation percentage in the test entity at that time

Entity A is a unit trust where entities have entitlements to all the income and capital of the trust, which is wholly owned by B, a trustee for Entity C.

Entity C is a discretionary trust where entities do not have entitlements to all the income and capital of the trust.

Entity C distributed 100% of its trust income to Entity D.

Entity D issued half of its shares to Entity C. The remainder of the shares were issued to Entity E.

Entity F distributed 100% of its income to Person X. Therefore, Person X has a direct small business participation percentage in Entity E of 100%.

Entity F has a 50% interest in Entity D. Therefore, Person X has an indirect small business participation percentage in Entity D of 50%.

Entity D received 100% of the trust income from Entity C. Therefore, Person X is deemed to have an indirect small business participation percentage in Entity C of 50%.

Entity C had a 100% interest in the trust income of Entity A. Therefore, person X is deemed to have an indirect small business participation percentage in Entity A of 50%. Therefore, person X is a significant individual in Entity A.