Private ruling: Small business concessions - significant individual test
Date of advice: 30 October 2025
Published: 15 December 2025
Ruling period: Year ending DD MM 20XX
Date scheme commenced: DD MM 20XX

Ruling: Q1: Have you had a significant individual for the purposes of section 152-50 of the Income Tax Assessment Act 1997 (ITAA 1997) for at least 15 years during the period of ownership of the relevant land? | A1: No.

Relevant facts and circumstances: You are a trust known as Trust A. Company A is your corporate trustee. Individual A and their children, Individual C and Individual D are the directors of Company A. Individual A and their spouse Individual B are the shareholders of Company A. Trust A owns X sections of farmland located which were acquired after 1985. Trust A intends to dispose of the properties during the relevant income year. The land has been farmed since acquisition. From 20XX, Trust B has farmed the land. Company B is the corporate trustee of Trust B. Individual C is the sole director and shareholder of Company B. Trust B pays a lease fee and an agistment fee to Trust A for use of the land. There is no formal or written agreement between the entities. Individual C is the principal decision-maker for the activities carried out on the land. There is no record of the distributions made by Trust A in the 19XX-19XX income years. The only persons and entities that have received distributions since then are Individual A, Individual B, and Company C. Individual A and Individual C are the directors of Company C. Company A, in its capacity as trustee of Trust A, holds X A-class shares and X B-class shares in Company C. Individual B held X C-class shares in Company C until May 20XX. This share was transferred to Trust A. Trust A therefore holds all of the shares on issue in Company C. All share classes in Company C have the same voting rights and rights to receive dividends. A-class shareholders only get paid up capital back on the winding up of the company. Individuals A and B have respectively received X% or more of the distributions from the trust for fewer than 15 years with Company C receiving the remainder of the distributions.

Relevant legislative provisions: Income Tax Assessment Act section 152-50 | Income Tax Assessment Act section 152-55 | Income Tax Assessment Act section 152-65 | Income Tax Assessment Act subsection 152-70(1) | Income Tax Assessment Act 1997 section 152-75 | Income Tax Assessment Act 1997 section 152-105 | Acts Interpretation Act 1901

Reasons for decision: Detailed Reasoning - Significant individual test: The significant individual test is contained in section 152-50 of the ITAA 1997. An entity satisfies this test if it had at least one significant individual just before the CGT event. The meaning of significant individual is contained in section 152-55 of the ITAA 1997. A significant individual is someone who holds a small business participation percentage (SBPP) of at least X% in a trust. An individual's SBPP in a trust under section 152-65 of the ITAA 1997 is the sum of their direct SBPP in the entity and their indirect SBPP in the entity. | Detailed Reasoning - Direct small business participation percentage: discretionary trust: The direct SBPP in a discretionary trust, where entities do not have fixed entitlements to all income and capital, is set out in item 3 of the table in subsection 152-70(1) of the ITAA 1997. The direct SBPP is calculated based on the proportion of income or capital distributions that the individual was beneficially entitled during the relevant income year. If both income and capital distributions are made, the smaller percentage applies. | Detailed Reasoning - Direct small business participation percentage: company: Item 1 of the table in subsection 152-70(1) of the ITAA 1997 provides an entity's direct SBPP in a company is the smallest of the percentage of voting power, the percentage of any dividend the company may pay, or the percentage of any distribution of capital the company may make that the entity has because of holding the legal and equitable interests in shares in the company. Where a company has more than one class of shares, all classes must be taken into account in determining if the company has a significant individual. The percentage of rights held in each class of share must be considered to determine the SBPP in a company that has different classes of shares. The fact that a shareholder holds 20% of one class of shares will not be sufficient if the directors have the discretion to make distributions of income or capital to any class to the exclusion of the other classes of shares. Taxation Determination TD 2006/77 Income tax: capital gains: are all classes of shares (other than redeemable shares) issued by a company taken into account in determining if the company has a significant individual under section 152-55 of the Income Tax Assessment Act 1997? (TD 2006/77) provides examples on how to work out if a company with different share classes has a significant individual. 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 of income or capital to one class of shareholders to the exclusion of another. A shareholder must be capable of receiving at least 20% of any distribution regardless of how such a discretion is exercised. TD 2006/77 contains the following examples: Example 1 Bedrock Co has two different classes of shares, A and B, which have equal distribution rights. Only the A class shares have voting rights. Each class of shares is held by different shareholders - the A class shares being held in equal proportions by Fred and Barney and the B class shares being held in equal proportions by their respective wives, Wilma and Betty. The directors of Bedrock Co can decide to make a distribution of income or capital to either class of shares to the exclusion of the other class of shares. There is the possibility of any of the shareholders receiving 50% of a distribution from the company, depending on the exercise of the directors' discretion. In this situation, Bedrock Co does not have a significant individual. There is no specific individual who has the right to receive at least 20% of any distribution the company may make. Fred and Barney (who each hold 50% of the voting power) might receive 50% of a distribution or they might not receive anything at all, depending on how the directors exercise their discretion. Example 2 A company has two different classes of shares, A and B, which have equal voting and distribution rights. Isaac holds 20% of the shares of each class. The directors can decide to make a distribution of income or capital to either class of shares to the exclusion of the other class of shares. In this situation, the company does have a significant individual. Isaac holds 20% of the voting power and, regardless of how the directors' discretion is exercised, Isaac will always receive 20% of any distribution made by the company. Indirect small business participation percentage The method for working out the indirect SBPP is provided in section 152-75 of the ITAA 1997. It is calculated by multiplying the holding entity's direct SBPP in the intermediate entity by the sum of the intermediate entity's direct SBPP in the test entity and the intermediate entity's indirect SBPP in the test entity. | Detailed Reasoning - The purpose of the significant individual test: The Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 7) Bill 2006 (EM) provides that the provisions related to the significant individual test were introduced to replace the 'controlling individual' test. The former test required the controlling individual to have at least 50% participation in an entity which could only be satisfied directly. The change introduced the ability for the test to be satisfied directly or indirectly through one or more interposed entities. The EM provides that the objective of replacing the old test with the significant individual test was to make the test 'less onerous' to increase the availability of the concessions amongst small business taxpayers. The EM states: The 20 per cent requirement allows additional small business taxpayers to access the concessions, while allowing indirect as well as direct interests has the additional advantage of assessing the real economic interests in the business. The small business concessions are intended for active participants in a small business, and the significant individual test represents a readily verifiable proxy for active participation. This reflects the fact that there is typically minimal separation of significant underlying ownership from management in small businesses. Put more simply, those who own a small business tend to run the business. | Detailed Reasoning - Application to your circumstance: Trust A is a discretionary trust that distributes income to Individual A and Individual B, who are spouses, as well as Company C. Individuals A and B will be significant individuals of Trust A if they had a SBPP of X% during an income year. | Detailed Reasoning - Direct small business participation percentage: Individuals A and B received at least X% of the distributions from Trust A, and therefore have a direct SBPP of at least X%, for fewer than 15 years. A total SBPP of X% in 15 income years is required to be eligible for the 15-year exemption. | Detailed Reasoning - Indirect small business participation percentage: The method for calculating the indirect SBPP is set out under section 152-75 of the ITAA 1997. In this case, the method can be expressed as: Individual A and B's indirect SBPP in Trust A = (Individual A and B's direct SBPP in intermediary) × (intermediary's direct SBPP in Trust A + intermediary's indirect SBPP in Trust A). If Individual A and Individual B are able to use Company C as an intermediate entity for the purposes of calculating their indirect SBPP in Trust A, they will meet the significant individual test if the sum of their direct and indirect SBPP is at least X% for 15 total income years. The terms 'interposed entity' or 'intermediate entity' are not defined within the ITAA 1997 or the Acts Interpretation Act 1901 . The Macquarie Dictionary defines 'interpose' as 'to place between; cause to intervene,' 'to put (a barrier, obstacle, etc.) between, or in the way,' and 'to come between other things; assume an intervening position or relation.' It defines 'intermediate' as 'being, situated, or acting between two points, stages, things, persons.' As described in the EM, the purpose of the 20% significant individual test is to be a 'readily verifiable proxy for active participation'. This language is consistent with the relevant methods being read as an objective test for determining whether someone is a significant individual of an entity. To be consistent with the relevant provisions, the intention of the legislation, and the ordinary meaning of the language used, the arrangement would need to be capable of having the relevant methods applied to be able to meet the significant individual test. If the arrangement does not fit with the method or fails in its application, there is no discretionary interpretation for relief. Company C has X shares. All share classes contain the same voting rights and rights to dividends. Company A, in its capacity as trustee for Trust A, holds X A-class shares and X B-class shares. Individual B owned X C class shares until May 20XX. Trust A was therefore the beneficial owner of X% of the shares in Company C. Under the indirect SBPP provisions, Individual A or Individual B do not have any indirect participation in the Trust A using Company C as an interposed entity. This is because Trust A is the beneficial owner of Company C, and Company C is a beneficiary of Trust A. There is no link flowing from the individuals through the company to the trust entity. When tracing through the entities for the purposes of calculating the indirect SBPP, the company does not sit between the individuals and the trust. Company C is therefore not an interposed or intermediate entity. Even if the indirect SBPP was applied, it would not have any effect. This is because Individual A and Individual B's direct SBPP in Company C is 0%. This would be multiplied by Company C's SBPP in Trust A, resulting in an overall indirect SBPP of X%. You therefore only had a significant individual for fewer than 15 income years.