When a company or its owners are seeking to access the small business CGT concessions it can be important to be able to determine with certainty whether a related individual is a significant individual in a company, or whether an individual is a CGT concession stakeholder of a company. That is because these concepts are ‘gateway’ tests for access to the following situations/concessions:
- When selling a share in a company
- When accessing the small business 15-year exemption
- When accessing the small business retirement exemption
- Access to the small business rollover
The Commissioner has always held the view that, in situations where there are different classes of shares on issue from a company, the discretion usually inherent in such a structure allows the directors to have the capacity to direct dividends with sufficient flexibility so that no single class of shares (or their shareholders) could truthfully say that they had an indefeasible equitable interest in 20% or more of the dividends in the relevant company. Without such an interest no shareholder can be either a significant individual or a CGT concession stakeholder.
Until now.
The recent AAT case of Devuba Pty Ltd v Commissioner of Taxation [2015] AATA 255 shows that this view is not necessarily what the actual test is in the law.
The company in the case had issued a dividend access share to an individual who owned no ordinary shares. These dividend access shares were entitled to dividends only if the directors determined that a dividend payment was to be made. The Commissioner argued that the discretion to pay a dividend to the owners of the dividend access shares meant that the holders of any one class of shares could be wholly excluded from receiving any dividend and as such the “…percentage of any dividend that the company may pay…” to that shareholder was nil. The company argued that until any decision was made by the directors to pay a dividend on the dividend access share the dividend entitlement under the dividend access share was nil and the dividend entitlement on the ordinary shares was 100%. As there was an individual who owned 50% of the ordinary shares then he has 50% of the dividend, capital and voting rights and thus was a significant individual/CGT concession stakeholder.
Relying upon the High Court case of FC of T v Casuarina Pty Ltd (1971) 127 CLR 62 the AAT declined to impute a hypothetical resolution of the payment of a dividend to the shareholder of the dividend access share as at the testing time for the small business CGT concessions. This left only the ordinary shares as being ones to which the dividend rights related to, and allowed the 50% ordinary shareholder to be a significant individual/CGT concession stakeholder.
Whilst an AAT case has little if any precedent value, it does rely on a High Court case and so may be one which other taxpayers may seek to rely on. Alternatively the Commissioner is unlikely to want this decision to stand as a possible approach. Seems to me that this case won’t be the last word on how this test works!
The test for advisors is how to structure transactions whilst this uncertainty is sorted out. As always.
Update: On 22 May the ATO appealed the decision in Devuba v Commissioner of Taxation to the Federal Court. Care should be taken before relying on the AAT judgement as the appeal decision may change the outcome.
