Case Study – Access to small business CGT concessions where shares are sold by a trust

by | Oct 11, 2015

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:

  1. 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
  2. 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.

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