Private ruling: Capital gains tax – small business concessions – significant individual
Date of advice: 30 August 2017
Published: December 2017
Ruling period: Income year ending 30 June 2018.
Date scheme commenced: 1 July 2017.

Ruling: Q1: Are you a significant individual of Company A as defined in section 152-55 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No.

Relevant facts and circumstances: After 20 September 1985, the start-up phase of Company A commenced. Company A is a privately owned Australian company. You have commercial qualifications and worked in a leadership role with the Managing Director (MD) of Company A for a number of months while the company was forming. As the internal staff number of Company A grew, your role initially in the company was to liaise with the MD. However, your role in Company A expanded and you commenced acting in a more senior position in the company. You were the first of a limited number of shareholders in Company A and were granted a XX% shareholding in the company. The shares issued in Company A were all of the same class, which carried the same voting rights and entitlement to distributions. You obtained the authority to act on behalf of a number of the other shareholders in Company A who held a total of XX% shareholdings in the company. You were paid an amount $XXX,XXX by the MD of Company A for the assistance you provided to the company. You sold your shares in Company A. Your authority to act on behalf of the other shareholders ceased when Company A was sold.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-55 | Income Tax Assessment Act 1997 Section 152-65 | Income Tax Assessment Act 1997 Section 152-70

Reasons for decision: Summary: Summary You are not a significant individual of Company A as defined in section 152-55 of the ITAA 1997 because your small business participation percentage in Company A is less than 20%. Detailed reasoning | Detailed Reasoning - Significant individual test: An individual is a significant individual in a company at a time, if at that time the individual has a small business participation percentage in the company of at least 20% (section 152-55 of the ITAA 1997). An individual's small business participation percentage in another entity at a time is the percentage that is the sum of the individual's direct small business participation percentage and indirect small business participation percentage in the other entity at that time (section 152-65 of the ITAA 1997). An individual holds a direct small business participation percentage at the relevant time in a company equal to the percentage worked out using the following: ● the percentage of any voting power that the individual is entitled to exercise; or ● the percentage of any dividends that the individual is entitled to receive; or ● the percentage of any distribution of capital that the individual is entitled to receive from the company; or, if they are different, the smallest of the three percentages. The percentage that the individual has in the company is because of the individual holding the legal and equitable interests in the company’s shares. In your case: ● you were granted a XX% shareholding in Company A which entitled you to: ● XX% of the company’s voting rights; ● XX% of the Company’s dividend distributions; and ● XX% of any capital that the Company made ● a number of the other shareholders, who had total shareholdings of XX%, gave you their authority to act on their behalf. As a result you had control of XX% of the voting rights in relation to Company A; and ● you received a payment of $XX,XXX for the services you provided to Company A. It is stated that the payment of $XXX,XXX to you had been explained to the other shareholders as being paid in relation to your assistance provided to Company A in relation to its development. Based on the information provided it is viewed that the $XXX,XXX was not a dividend, but was a payment of fees for the services you provided to Company A. As outlined above, if the individual’s direct small business participation percentages are different, it is the smallest percentage that is used when determining whether the percentage is at least 20%. Your percentages are different; therefore it is the smallest percentage that will be taken into consideration when determining whether you are a significant individual. It is viewed that your smallest percentage was XX% for your entitlement to receive dividends from Company A. Alternatively; it is XX% for your entitlement to receive any capital that the Company made in accordance with your shareholding in the company. Therefore, your direct small business participation percentage is XX%. As your small business percentage is less than 20%, you are not viewed as being a significant individual of the Company under section 152-55 of the ITAA 1997.