Issue
A company is owned as follows:
- Individual A 25%
- Individual B 25%
- Individual C 40%
- Discretionary Trust A 10%
None of the individuals are associates of each other. Discretionary Trust A is controlled by Individual A and distributes all its income and/or capital equally each year to individual A and her spouse Mr A.
All the shares in the company are sold. On the basis the $6 million net asset value and active asset tests are met, is Discretionary Trust A eligible to access the small business CGT concessions?
Answer
Where an active asset that is a share in a company is sold there are further basic conditions in addition to those in s. 152-10(1) of the ITAA 1997 that are to be met. Section 152-10(2) ITAA 1997 requires that either:
- the entity making the capital gain is a CGT concession stakeholder in the object company (i.e. a significant individual and/or their spouse); or
- CGT concession stakeholders in the company have a small business participation percentage (SBPP) of at least 90% in the entity that is selling the shares.
A CGT concession stakeholder of a company is a significant individual in the company and the spouse of a significant individual to the extent the spouse’s SBPP percentage is greater than zero.
Discretionary Trust A cannot be a CGT concession stakeholder as it is not a natural person. As such, the question is whether it can meet the second limb of section 152-10(2) of the ITAA 1997.
At a glance, it may be considered that Discretionary Trust A will not be eligible as it holds less than 20% of the issued capital in the company, however, this is not the test.
Do CGT concession stakeholders have a SBPP of at least 90% in Discretionary Trust A?
If the historical annual distribution pattern of distributing to A and Mrs A equally continues in the year the shares are sold then the answer to this question is ‘Yes’.
A is a significant individual and therefore a CGT concession stakeholder via her direct shareholding in the company of 25%. Mr A will be also be a CGT concession stakeholder as his SBPP in the company is 5% via his 50% distribution entitlement from Discretionary Trust A as he is the spouse of a significant individual.
Given CGT concession stakeholders will have a 100% SBPP in Discretionary Trust A the requirements of section 152-10(2)(b) of the ITAA 1997 will be met and access to the small business CGT concessions is available.
