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?
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.
This article was prepared by Webb Martin Consulting. If you have any questions, or wish to seek advice on matters referred to in this article, we can be contacted on (03) 8662 3200 or firstname.lastname@example.org.