Private ruling: CGT- small business participation percentage - significant individual
Date of advice: 23 January 2026
Published: 16 March 2026
Ruling period: 1 July 20XX to 30 June 20XX

Ruling: Q1: Did Company X have 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 Company X owned the Water Licences, for the purposes of paragraph 152-110(1)(c) of the Income Tax assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Can the capital gain that accrued before the resetting in 20XX of the pre-CGT asset (the Water Licences), under Division 149 of the ITAA 1997, be distributed by Company X to Individual A and Individual B as Company X.'s * CGT concession stakeholders , under Subdivision 152-B of the ITAA 1997? | A2: Not applicable. | Q3: Will the Commissioner accept that if Company X's Directors resolve to distribute the exempt amount to Individual B and Individual A, the requirement in paragraph 152-125(1)(b) of the ITAA 1997 has been satisfied? | A3: Not applicable. | Q4: Did Individual A have a * small business participation percentage in Company X just before the relevant *CGT event (the sale of the Water Licences in 20XX), and thus a * stakeholder's participation percentage in Company X, of 15% for the purposes of subsection 152-125(2) of the ITAA 1997? | A4: Not applicable. | Q5: Did Individual B have a * small business participation percentage in Company X just before the relevant *CGT event (the sale of the Water Licences in 20XX), and thus a * stakeholder's participation percentage in Company X, of 85% for the purposes of subsection 152-125(2) of the ITAA 1997? | A5: Not applicable. | Q6: Will the Commissioner exercise the discretion under paragraph 103-25(1)(b) of the ITAA 1997 to allow Company X an extension of time in which to make a choice to apply the CGT 15-year exemption in Subdivision 152-B of the ITAA 1997? | A6: Not applicable. | Q7: Will the Commissioner exercise the discretion under subsection 152-125(4) of the ITAA 1997 to extend the time in paragraph 152-125(1)(b) of the ITAA 1997 for Company X to make payments of the CGT exempt amount to Company X's CGT concession stakeholders, Individual A and Individual B? | A7: Not applicable.

Relevant facts and circumstances: Trust 1. A discretionary trust was established by a Deed made on DDMMYYYY for the benefit of Individual A, their wife Individual B, and their family. 2. The Trust carried on a primary production business in partnership. Trust's financial results & distributions 3. In a number of income years before 20XX, the Trust incurred losses or had no "net income" (as a result of carry-forward tax losses). In other years, the Trust's net income was small and was distributed to Individual A and individual B, their son and in some cases Company X. 4. The Trust's net income and distributions to beneficiaries, from 19XX through 20XX was provided. 5. The Trust's distributions to beneficiaries, as a percentage of the Trust's "net income", from 19XX through 20XX, was provided. Company X 6. Company X was incorporated in 19XX by Individual A's parents and carried on an agricultural business for many years. 7. Individual A and Individual B have been closely connected with Company X since the early 19XXs (indeed since the early 1960s when they were married). 8. In the 20XX income year - the year in which Company X sold the Water licences Company X issued share capital was held and remains held as follows: Table 1: Share capital Class of share No. of shares Holder A xxxx Individual B Not applicable x Individual A B xxxx Trust D xxxx Trust IM xxxx Trust Total xxxxx Not applicable 9. During the 2008 income year, Individual B received 80% of the income of the Trust, while Individual A received 20% of that income. 10. Company X.'s shares confer equal rights to participate in surplus assets on a winding up and all shares carry an equal vote. 11. Company X's directors have the power to pay dividends to the holders of one or more classes of its shares, to the exclusion of the holders of the other classes. Farmland and water licences purchased before 20 September 1985 12. Company X purchased the following assets before 20 September 1985 (being the date from which the capital gains tax (CGT) rules in ITAA 1997 generally apply): • X Station - in MMYYYY (Farmland); and • certain water licences for the benefit of the Farmland in the early 19XX (Water Licences). Change of majority underlying interest in company X in 20XX 13. In 20XX, Individual A transferred their 3,000 A class shares in Company X to Individual B, resulting in a change in the *majority underlying interests in Company X. 14. The Farmland and Water Licences therefore stopped being pre-CGT assets and were treated as being acquired by Company X in 20XX, at their market value, at that time. 15. A 'Pre-CGT Reserve' of $X,XXX,XXX was established in Company X.'s financial accounts attributable to the resetting of the Farmland and Water Licence assets under Division 149. Sale of water licences by company X in 20XX 16. The Water Licences were sold in the 20XX income year. 17. Company X derived a taxable capital gain of $ X,XXX,XXX on the disposal of the Licences, which was reduced to nil by applying the 50% reduction and using carry forward losses. 18. In 20XX Company X satisfied the basic conditions in Subsection 152-A for the gain. 19. The farmland was not sold, however, until a few years ago due to the difficulties faced for many years by the farming sector. Individual A and B wish to liquidate company X 1. Individual A is currently xx years old. 2. Individual A passed away in early 20xx at the age of xx. 3. It has recently come to light, as part of the pre-liquidation planning for Company X, that if in 20xx Company X had chosen the 15-year exemption-instead of the 50% reduction-the tax that would otherwise be payable on the liquidation of WAPL would be reduced.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 152-B | Income Tax Assessment Act 1997 section 152-50 | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 section 152-65 | Income Tax Assessment Act 1997 section 152-70 | Income Tax Assessment Act 1997 subsection 152-70(1) | Income Tax Assessment Act 1997 subsection 152-70(2) | Income Tax Assessment Act 1997 subsection 152-70(4) | Income Tax Assessment Act 1997 subsection 152-70(5) | Income Tax Assessment Act 1997 subsection 152-70(6) | Income Tax Assessment Act 1997 section 152-75 | Income Tax Assessment Act 1997 section 152-110 | Income Tax Assessment Act 1997 subsection 152-110(1) | Income Tax Assessment Act 1997 paragraph 152-110(1)(c)

Reasons for decision: Summary: The small business participation percentage of each shareholder in Company X is 0%. There is no significant individual in Company X as no shareholder has a small business participation percentage in the company of at least 20% as required under section 152-55. Therefore, the condition in paragraph 152-110(1)(c) has not been satisfied and so the 15-year exemption does not apply to disregard any capital gain arising from a CGT event. | Detailed Reasoning - Detailed reasoning: Subdivision 152-B contains the small business 15-year exemption that allows a small business to disregard a capital gain arising from a CGT asset that it has owned for at least 15 years. Subsection 152-110(1) sets out the following conditions that companies and trusts must satisfy before claiming the 15-year exemption: 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; Note: Section 152-115 allows for continuation of the period if there is an involuntary disposal of the asset. (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 you 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 of the CGT event and the event happened in connection with the individual's retirement; or ii. was permanently incapacitated at that time. Where all these conditions are satisfied, the entity can disregard any capital gain arising from the CGT event. | Detailed Reasoning - Significant individual: Paragraph 152-110(1)(c) 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). Section 152-50 provides that an entity satisfies the significant individual test if the entity had at least one significant individual just before the CGT event. Under section 152-55 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%. Section 152-65 provides that this 20% is made up of the total of direct and indirect small business participation percentage in the other entity. | Detailed Reasoning - Direct small business participation percentage in a company: Item 1 of the table in subsection 152-70(1) provides an entity's direct small business participation percentage 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 (other than redeemable shares) must be taken into account in determining if the company has a significant individual (subsection 152-70(2)). To determine the small business participation percentage in a company that has different classes of shares, the percentage of rights held in each class of share is considered. 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 ? 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 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 provides 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. | Detailed Reasoning - Indirect small business participation percentage in a company: The indirect small business participation percentage considers an entity's interest in a company that is held through an interposed entity. Section 152-75 provides that an entity's indirect small business participation percentage in a company is calculated by multiplying together the entity's direct small business participation percentage in an interposed entity and the interposed entity's total small business participation percentage (both direct and indirect) in the company. | Detailed Reasoning - Direct small business participation percentage in the discretionary trust: To calculate an entity's indirect small business participation percentage the first step is to determine the direct small business participation percentage in the interposed entity. Where the interposed entity is a trust, item 3 of the table in subsection 152-70(1) provides that an entity holds a direct small business participation percentage at the relevant time in an entity equal to the percentage worked out as below: A trust (where entities do not have entitlements to all the income and capital of the trust), and the trust makes a distribution of income or capital, it is the percentage of: • distributions of income that the entity is beneficially entitled to during an income year, or • distributions of capital that the entity is beneficially entitled to during an income year, or • if two different percentages apply, then the smaller of the two. No income or capital distribution > Subsections 152-70(4), (5) and (6) provide a special rule for discretionary trusts if the trustee does not make a distribution of income or capital in an income year. Subsection 152-70(4) provides: Subsections (5) and (6) apply for the purpose of working out the *direct small business participation percentage in an entity in connection with a *CGT event that happened in an income year (the CGT event year), if: (a) the entity is a trust (where entities do not have entitlements to all the income and capital of the trust); and (b) (b) during the relevant year mentioned in item 3 of the table in subsection (1) (disregarding subsection (5)), the trustee mentioned in that item: i. does not make a distribution of income; and ii. does not make a distribution of capital. Subsection 152-70(5) provides: Treat the references in that item to the relevant year as being references to: (a) if the trustee made a distribution of income or capital during the CGT event year - the CGT event year; or (b) (b) otherwise - the last income year before the CGT event year in which the trustee did make a distribution of income or capital. Under subsections 152-70(4) and (5), if the trustee made a distribution in the CGT event year, the distribution percentage in that year is used, or otherwise the distribution percentage of the last income year before the CGT event year where it did make a distribution is used. For the income years where there is no net income or a loss and therefore no distribution was made, the reference to 'relevant year' for the purposes of working out the direct small business participation percentage in the trust is not a reference to distributions in the relevant year where there was no net income or loss, but a reference to distributions in the CGT event year (2008). See example 8.19 in the EM to the Tax Laws Amendment (2011 Measures No. 9) Bill 2011: Example 8.19 XYZ trust is a trust where entities do not have entitlements to all of the income and capital of the trust. XYZ trust operates a business and owns land that it has used in the course of carrying on its business for the last 20 years. Evan, Mario, Denise and Katrina are all objects of XYZ trust and have been so for the last 20 years. After suffering a bad trading year, XYZ trust decides to sell the land. XYZ trust's aggregated turnover for the income year in which it sells the land (the CGT event year) is less than $2 million. XYZ trust wants to exempt the capital gain under the small business 15-year exemption and pay out the exempt amount to Evan, Mario, Denise and Katrina. In order for XYZ trust to meet the conditions of the small business 15-year exemption, Evan, Mario, Denise and Katrina have to work out a small business participation percentage in XYZ trust. The trustee of XYZ trust did not make a distribution in the CGT event year and the trust had a tax loss for that year. The trustee made a distribution of income in the year prior to the CGT event year with Evan being beneficially entitled to 40 per cent of the income and Mario, Denis and Katrina each being beneficially entitled to 20 per cent of the income. The trustee did not make a distribution of capital in that year. In all the other income years except the income year 14 years before the CGT event year, the trustee of XYZ trust made a distribution and XYZ trust had a significant individual. In the income year 14 years before the CGT event year, the trustee did not make a distribution and the trust had a tax loss for that year. The amendments allow a direct small business participation percentage to be calculated for Evan, Mario, Denise and Katrina for the CGT event year and for the income year 14 years before the CGT event year. As there is no distribution in the CGT event year, the focus shifts to the last income year before the CGT event year in which there was a distribution - that is, the income year prior to the CGT event year. Therefore, in the CGT event year and in the income year 14 years before the CGT event year the direct small business participation percentages are as follows: 40 per cent for Evan; and 20 per cent for each of Mario, Denise and Katrina. In the circumstances of this example, the amendments allow XYZ trust to have a significant individual in the two tax-loss years. As Mario was 60 years of age just before the land was sold, XYZ trust would be able use the small business 15-year exemption to exempt the capital gain on the sale of the land so long as the other relevant conditions of the small business 15-year exemption are met. If no distributions were made because the trust had no net income and had a tax loss, the reference to the relevant year in item 3 of the table in s 152-70(1) is treated as reference to the CGT event year. The small business participation percentage is calculated using the CGT event year which is applied to all the other years where there has been no distribution. For completeness, paragraph 152-70(6)(a) provides that the small business participation percentage in a discretionary trust is zero if the trust had net income and no tax loss in an income year and the trustee did not make a distribution in that income year. The percentage will also be zero under paragraph 152-70(6)(b) if the trustee has never made a distribution in the income years up to and including the CGT event year. Calculation of the indirect small business participation percentage under section 152-75 where a company has different classes of shares and the director has a discretion to pay a dividend to one class of shareholders to the exclusion of another can mean there is no significant individual in a company due to the operation of the principle in TD 2006/77. | Detailed Reasoning - Significant individual: To determine if Company X has a significant individual for the purposes of section 152-55 either Individual A or Individual B will need to have a small business participation percentage in the company of at least 20% in the relevant income years. The 20% small business participation percentage is the sum of their individual direct and indirect small business participation percentages (section 152-65). | Detailed Reasoning - Direct small business participation percentage: Company X is a company with 4 different classes of shares. The shares have equal distribution rights and voting rights. Individual B holds legal and equitable title to 3000 class A shares and Individual A holds legal and equitable title to 1 class A share. Neither Individual A or Individual B holds legal and equitable title to any class B, D or IM shares. The Trust holds 3000 of each of the class B, D and IM shares, but no class A shares. The Company X's directors have the power to pay dividends to the holders of one or more classes of shares to the exclusion of the holders of any other class or classes of shares. | Detailed Reasoning - Individual B's direct small business participation percentage: In these circumstances where Individual B only holds legal and equitable right to Class A shares and the Company X's directors have the power to pay dividends to the holders of one or more classes of shares to the exclusion of the holders of other classes of shares, Individual B's direct small business participation percentage in the company is 0%. As Individual B only holds the legal and equitable title to A class shares where there are also class B, D and IM shares in Company X and they does not hold legal and equitable title to the class B, C and IM shares as required by table 1 of subsection.152-70(1), any interest in these shares are not included in the calculation of their direct small business participation percentage. Like example 1 in TD 2006/77, Individual B 's right to a distribution of income from the company is dependent on how the directors' exercise their discretion. In accordance with the directors' discretion Individual B might receive 25% of the distribution from their A class shares to the exclusion of the B, D and IM shares held by the Trust or they might not receive anything at all if the Trust received a distribution of income from their B, D and IM shares to the exclusion of their A Class shares. As Individual B is not capable of receiving a distribution regardless of how the discretion is exercised their direct small business participation percentage is 0%. A shareholder must be capable of receiving at least 20% of any distribution regardless of how a director's discretion is exercised to be a significant individual. | Detailed Reasoning - Individual A's direct small business participation percentage: Likewise, Individual A only holds the legal and equitable title to Class A shares and therefore also has a direct small business participation percentage of 0%. Depending on how the directors' discretion is exercised, Individual A might receive 0.008% of any distribution of the company or they might not receive anything at all. | Detailed Reasoning - Trust's direct small business participation percentage: Similarly, the Trust as the holder of class B, D and IM shares, but no class A shares has a direct small business participation percentage of 0%, as the Trust is not capable of receiving a distribution regardless of how the discretion is exercised. | Detailed Reasoning - Individual B: Section 152-75 provides that Individual B's indirect small business participation percentage in the company is calculated by multiplying together their direct small business participation percentage in the Trust as an interposed entity, and the Trust's total small business participation percentage (both direct and indirect) in the company. | Detailed Reasoning - Individual B's direct small business participation percentage in the trust: Individual B received a distribution from the discretionary trust of 80% in the 2008 income year and therefore had a direct small business participation percentage of 80% in the discretionary trust. | Detailed Reasoning - Trust's total small business participation percentage: As the company has different classes of shares and its directors have a discretion to pay a dividend to one class of shareholders to the exclusion of others, consistent with the principle in TD 2006/77, the Trust had a direct small business participation percentage in the company of 0%, as the Trust's right to a distribution of income from the company was dependent on how the directors exercised their discretion. The Trust had no indirect small business participation percentage. The Trust's total small business participation percentage is the sum of its direct small business participation percentage and its indirect small business participation percentage in the company which is 0% (0% + 0% = 0%). Individual B's indirect small business participation percentage in the company via the interposed Trust is calculated as their direct small business participation percentage of 80% in the Trust multiplied by the Trust's total small business participation percentage in the company of 0%. Therefore, their indirect small business participation percentage in the company was 0% (80% × 0% = 0%). | Detailed Reasoning - Individual B's total small business participation percentage: Individual B's total small business participation percentage in the company is the sum of their direct small business participation percentage of 0% and their indirect small business participation percentage of 0% in the company (0% + 0% = 0%). As Individual B has a total small business participation percentage of 0% in the company, which is less than the requisite 20%, they is not a significant individual under section 152-55. | Detailed Reasoning - Individual A's direct small business participation percentage in the trust: Individual A received a distribution from the discretionary trust of 20% in the 2008 income year and therefore had a direct small business participation percentage of 20% in the discretionary trust. As concluded above the Trust's total small business participation percentage was 0%. Individual A's indirect small business participation percentage in the company via the interposed Trust is calculated as their direct small business participation percentage of 20% in the Trust multiplied by the Trust's total small business participation percentage in the company of 0%. Therefore, their indirect small business participation percentage in the company was 0% (20% × 0% = 0%). | Detailed Reasoning - Individual A's total small business participation percentage: Individual A's total small business participation percentage is the sum of their direct small business participation percentage of 0% and indirect small business participation percentage of 0% in the company (0% + 0% = 0%). As Individual A has a total small business participation percentage of 0% in the company, which is less than the requisite 20%, they are not a significant individual under section 152-55. Further, even though Individual B and Individual A are beneficiaries of the Trust that holds B, D and IM shares, the Trust's small business participation percentage in the company is also 0% as the Trust's right to a dividend from the company was also dependent on how the directors exercised their discretion. | Detailed Reasoning - Conclusion: The small business participation percentage of each shareholder in the company is 0% as Company X has more than one class of shares and each shareholders' right to any dividends from the company is dependent on a director's discretion to pay dividends to one class of shareholders to the exclusion of another class of shareholders, so that no shareholder can be taken to have an entitlement to any dividend the company may pay. As there is no shareholder that can receive a dividend regardless of how the discretion is exercised, consistent with the principle in TD 2006/77 there is no specific individual who has a total small business participation percentage of at least 20% in the company to qualify as a significant individual under section 152-55. As a result, the company does not have a significant individual in the income year immediately before the CGT event or for a total of at least 15 years of the whole period of ownership. Subsequently, the requirement contained in paragraph 152-110(1)(c) has not been satisfied so the 15-year exemption does not apply to disregard any capital gain arising from a CGT event. | Detailed Reasoning - Detailed reasoning: Not applicable. As concluded in question 1 above, Company X does not have a significant individual as required within the definition of a CGT concession stakeholder under section 152-60. | Detailed Reasoning - Detailed reasoning: Not applicable. As concluded in question 1 Company X does not have a significant individual, and therefore the requirement in paragraph 152-110(1)(c) for claiming the 15-year exemption has not been satisfied. Further, neither Individual A nor Individual B are CGT concession stakeholders, so the question of distribution of the exempt amount does not arise. | Detailed Reasoning - Detailed reasoning: Not applicable. As concluded in question 1, Individual A' s small business participation percentage in Company X is 0% and Company X does not have a significant individual and therefore did not have a CGT concession stakeholder. | Detailed Reasoning - Detailed reasoning: Not applicable. As concluded in question 1 Individual B's small business participation percentage in Company X is 0% and Company X does not have a significant individual and therefore did not have a CGT concession stakeholder. | Detailed Reasoning - Detailed reasoning: Not applicable. As concluded in question 1 Company X does not have a significant individual, and therefore the requirement in paragraph 152-110(1)(c) for claiming the 15-year exemption has not been satisfied. In circumstances where Company X does not qualify for the 15-year exemption the possibility of a Commissioner's discretion under paragraph 103-25(1)(b) to allow Company X an extension of time to make a choice to apply the CGT 15 year exemption is otiose. | Detailed Reasoning - Detailed reasoning: Not applicable. In the circumstances where Company X does not have a CGT concession stakeholder, the need for a Commissioner's discretion under subsection 152-125(4) is otiose.