Private ruling: The existence of a significant individual
Published: June 2015
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: If X has made or makes a choice under subsection 152-45(2) of the Income Tax Assessment Act 1997 (ITAA 1997), will the effect of subsection 152-115(2) be that X is a significant individual in Company A for at least the required 15-year period for the purposes of paragraph 152-110(1)(c) on the basis that X will be deemed to have been the sole shareholder for that period? | A1: Yes | Q2: If X is classified to be a significant individual in Company A for the 15-year period, will the Commissioner accept that as a result of the statements in the first ruling request, X has already made the 'choice' pursuant to subsection 152-45(2) of the ITAA 1997 for a CGT asset? | A2: No | Q3: If the Commissioner rules favourably on the first question but does not accept the 'choice' pursuant to subsection 152-45(2) of the ITAA 1997 has already been made, will the Commissioner allow a longer period of time for X to make that 'choice' pursuant to paragraph 103-25(1)(b)? | A3: Yes | Q4: If the Commissioner agrees that X was a significant individual in Company A for 15 years, will the Commissioner exercise his discretion under subsection 152-125(4) of the ITAA 1997 to extend the 2 year period under subsection 152-125(1) for the making of a payment by Company A to X until 30 June 2015? | A4: Yes

Relevant facts and circumstances: X has been a director of Company A since its incorporation, which was over 15 years ago. X's ex-spouse was a director of Company A for a period of time. X and their ex-spouse were divorced. At the time of incorporation, the share structure of Company A consisted of two classes of shares, with X holding one class and X's ex-spouse holding the other class of shares. The Court Order, under the Family Law Act 1975 , explains that X's ex-spouse is to transfer their shares in Company A to X. Both classes of shares held the same rights, as follows; • voting rights • distribution of profits and capitalised profits may have been made to a Class of share to the exclusion of any other Class of share (whilst directors may recommend such dividends, discretion as to payment of dividends are made by the company in a general meeting) • entitlements to capital distributions in accordance with a liquidator's determination as to the division of any property (with the sanction of a special resolution of members) Company A made certain capital gains on the disposal of assets it owned. The assets had been owned by Company A for the 15 year period referred to in paragraph 152-110(1)(b) of the ITAA 1997. X is over the age of 55 and has retired. Company A satisfied the maximum net asset value (MNAV) test in section 152-15 of the ITAA 1997 and the active test (section 152-35), as they applied to it just before the CGT event that occurred.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-60 | Income Tax Assessment Act 1997 Section 152-55 | Income Tax Assessment Act 1997 Subdivision 126-A | Income Tax Assessment Act 1997 Section 126-5 | Income Tax Assessment Act 1997 Section 152-45 | Income Tax Assessment Act 1997 Section 152-115 | Income Tax Assessment Act 1997 Section 103-25 | Income Tax Assessment Act 1997 Section 152-110 | Income Tax Assessment Act 1997 Section 152-125

Reasons for decision: Detailed Reasoning - Significant individual and CGT concession stakeholder: As per section 152-60 of the ITAA 1997 an individual is a capital gains tax (CGT) concession stakeholder of a company if they are a significant individual or the spouse of a significant individual, where the spouse has a small business participation percentage in the company at that time that is greater than zero. Under section 152-55 of the ITAA 1997 an individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. This 20% can be made up of direct and indirect percentages. An entity's direct small business participation percentage in a company is the percentage of: • voting power that the entity is entitled to exercise • any dividend payment that the entity is entitled to receive • any capital distribution that the entity is entitled to receive, or • if they are different, the smallest of the three definitions above. | Detailed Reasoning - CGT marriage/relationship breakdown roll-overs: Subdivision 126-A of the ITAA 1997 considers same asset roll-overs in the context of marriage breakdown. Section 126-5 of the ITAA 1997 states there is a roll-over if a CGT event (the trigger event) happens involving an individual (the transferor) and his or her spouse (the transferee), or a former spouse (also the transferee) because of, among other things, a court order under the Family Law Act 1975 or under a State law, Territory law or foreign law relating to breakdowns of relationships between spouses. Subsection 126-5(5) of the ITAA 1997 explains that, for a disposal case where the transferor acquired the asset on or after 20 September 1985, the first element of the asset's cost base (in the hands of the transferee) is the asset's cost base (in the hands of the transferor) at the time the transferee acquired it. | Detailed Reasoning - Continuing time periods for involuntary disposals: Section 152-45 of the ITAA 1997 discusses continuing time periods for involuntary disposals. Subsection 152-45(2) provides that if you were the transferee of a CGT asset for which there has been a roll-over under Subdivision 126-A, then you may choose that the active asset test in section 152-35 applies as if: a) you had acquired the asset when the transferor acquired the asset; and b) the asset had been an active asset of yours at all times when the asset was an active asset of the transferor; and c) the asset had not been an active asset of yours at all times when the asset was not an active asset of the transferor. If you don't make a choice, the time of acquisition is simply the time of transfer. It is accepted that the choice is relevant for determining whether a company or trust satisfies the significant individual test under subsection 152-115(2) of the ITAA 1997. | Detailed Reasoning - Making a choice: Subsection 103-25(1) of the ITAA 1997 provides that a choice you can make under this Part or Part 3-3 must be made: a) by the day you lodge your income tax return for the income year in which the relevant CGT event happened; or b) within a further time allowed by the Commissioner. | Detailed Reasoning - Significant individual and the 15 year exemption: Subsection 152-115(2) of the ITAA 1997 provides that if you made the choice mentioned in subsection 152-45(2) for a CGT asset, then paragraphs 152-105(b) and (c) and 152-110(1)(b) and (c) (the 15-year and significant individual rules) apply as if you had acquired the asset when the transferor acquired it. Subsection 152-110(1) of the ITAA 1997 explains that an entity that is a company or trust can disregard any capital gain arising from a CGT event if all of the following conditions are satisfied: a) the basic conditions in Subdivision 152-A are satisfied for the gain; b) the entity continuously owned the CGT asset for the 15-year period ending just before the CGT event; c) the entity had a significant individual for a total of at least 15 years (even if the 15 years was not continuous and it was not always the same significant individual (during which the entity owned the CGT asset; d) an individual who was a significant individual of the company or trust just before the CGT event either: i. was 55 or over at the time and the event happened in connection with the individual's retirement; or ii. was permanently incapacitated at that time. | Detailed Reasoning - 15 year exemption and payment to CGT concession stakeholders: Section 152-125 explains that if a capital gain made by a company or trust is disregarded under the small business 15–year exemption, any distributions made by the company or trust of that exempt amount to a CGT concession stakeholder is: • not included in the assessable income of the CGT concession stakeholder, and • not deductible to the company or trust provided certain conditions are satisfied. The conditions are: • the company or trust must make a payment within two years after the CGT event that resulted in the capital gain • the payment must be made to an individual who was a CGT concession stakeholder of the company or trust just before the CGT event, and • the total payments made to each CGT concession stakeholder must not exceed an amount determined by multiplying the CGT concession stakeholder's control percentage by the exempt amount. Subsection 152-125(4) of the ITAA 1997 provides that the Commissioner may extend the two year time limit to make a payment to a CGT concession stakeholder. | Detailed Reasoning - Application to your circumstances: Was X considered a significant individual for at least 15 years? Since the court order transfer of shares, X has held 100% of the shares in the company. Accordingly, their small business participation percentage is 100% and they were a significant individual of the company in accordance with section 152-55 of the ITAA 1997 at the time of the CGT event. In order to apply the 15 year exemption to a capital gain, paragraph 152-110(1)(c) of the ITAA 1997 requires that a company had a significant individual for a total of at least 15 years of the whole period of ownership (even if it was not the same significant individual during the whole period). As the period between the transfer of shares and the CGT event is less than 15 years, we need to consider if the company had a significant individual prior to this date to determine if the requirement in paragraph 152-110(1)(c) of the ITAA 1997 has been met. Prior to the transfer of shares, X held one class of shares in the company. The remaining class of shares was held by X's ex-spouse. The Memorandum and Articles of Association for the company provides that distributions of profits and capitalised profits may be made to any one or more class of share or classes of shares to the exclusion of the shares of any other class of share or classes of shares. Taxation Determination TD 2006/77 provides that all classes of shares must be taken into account in determining if a company has a significant individual. It follows that a shareholder that holds more than 20% of one class of shares in a company will not be a significant individual if their right to any distribution of income or capital from the company is dependent on a discretion to make distributions to any class of shares to the exclusion of the other classes of shares. A shareholder must be capable of receiving at least 20% of any distribution regardless of how a discretion is exercised. Prior to the share transfer, X held only one class of shares and X's ex-spouse held only the other class of shares. In accordance the Memorandum and Articles of Association, one class of shares may have received a distribution of income to the exclusion of the other class of shares that X held. Similarly, the other class of shares may have received a distribution of income to the exclusion of the shares that X's ex-spouse held. In accordance with TD 2006/77, neither X nor X's ex-spouse were significant individuals of the company for the period from incorporation to the transfer date. Their small business participation percentage in the company was zero as their right to a distribution of income from the company was dependent on how the shareholders exercised their discretion. However, if you make a choice to apply subsection 152-45(2) of the ITAA 1997 you are taken to have acquired the asset when the transferor acquired the asset. In this case, if X has made the choice for the continuing time period to apply to the shares received from X's ex-spouse they would have been considered to have held the shares since incorporation of the company. As X is considered to have held the shares since incorporation, they now satisfy the significant individual rule for the 15 year period which is required for the company to be eligible for the 15 year exemption concession. Accordingly, X was a significant individual and therefore a CGT concession stakeholder for at least 15 years and, also just before the CGT event. Is it considered that X has already made a 'choice' under Subsection 152-45(2) of the ITAA 1997 to have acquired the asset when X's ex-spouse acquired the asset? Subsection 103-25(1) of the ITAA 1997 states that the choice must be made by the day you lodge your income tax return for the income year in which the relevant CGT event happened. You lodged your income tax return without claiming the 15 year exemption. While it is acknowledged that you lodged a private ruling application earlier to request determination on whether you had a significant individual for at least 15 years, there are no facts provided in that application to indicate that you were accessing the marriage breakdown roll-over provisions in Subdivision 126-A of the ITAA 1997 which would have allowed you to apply the continuing time period provision under section 152-45. Accordingly, it cannot be accepted that X has already made the choice under section 152-45 of the ITAA 1997. Will the Commissioner allow a longer period of time for X to make the 'choice' pursuant to paragraph 103-25(1)(b) of the ITAA 1997? Based on the information now provided, which indicates that you have satisfied the marriage breakdown roll-over provisions under Subdivision 126-A of the ITAA 1997, the Commissioner will allow a longer period of time for X to make the 'choice' to apply the continuing time period provision under section 152-45. Will the Commissioner extend the 2 year time period to make the payment to the CGT concession stakeholder until 30 June 2015? As the Commissioner has allowed a longer period of time for X to make the 'choice' to apply the continuing time period provision under section 152-45 of the ITAA 1997, he will also extend the 2 year period to make the payment to X (the CGT concessions stakeholder) until 30 June 2015.