Private ruling: Capital gains tax small business concessions
Published: August 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is X considered to be a capital gains tax (CGT) concession stakeholder in the company for the purposes of the small business CGT concessions just before the CGT event? | A1: Yes | Q2: Has the company had a significant individual for 15 years as required under paragraph 152-110(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No

Relevant facts and circumstances: X is a director of the company and has been since incorporation. X's ex-spouse, was a director of the company for a period of time. There are various classes of shares issued in the company. There have been changes to the shareholdings over time; however X currently holds more than 20% of the each of the classes of shares on issue. All shares posses the same voting rights. 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. Directors of the company may recommend how dividends should be paid, however the final discretion of the declaration of dividends rests with the shareholders in a general meeting. Historically, more than 20% of all distributions were paid to X. In relation to capital distributions, it is up to the liquidator to determine how the division of any assets of the company is to be carried out between the shareholders or different classes of shareholders. The assets in the company were disposed of during the relevant financial year (the CGT event). The company satisfies the maximum net asset value test contained in section 152-15 of the ITAA 1997 and the active asset test contained in section 152-35 of the ITAA 1997. X is over 55 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-55 | Income Tax Assessment Act 1997 Section 152-60 | Income Tax Assessment Act 1997 Subsection 152-70(1) | Income Tax Assessment Act 1997 Paragraph 152-110(1)(c)

Reasons for decision: Summary: As per section 152-60 of the ITAA 1997 an individual is a 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. At the time of the CGT event X held more than 20% of all of the classes of shares on issue. Accordingly, X's small business participation percentage is more than 20% and X was 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 that X held more than 20% of all of the classes of shares on issue 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. Previously, X held more than 20% of only one class of the shares in the company. The remaining shareholders also only held one class of shares. Distributions of profits and capitalised profits of the company 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. TD 2006/77 provides the following example: 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. In this case, for a period of time, all shareholders in the company only held one class of share each. It was possible for one class of share to receive a distribution of income to the exclusion of the others. In accordance with TD 2006/77, there were no significant individuals of the company for a period of time. The shareholders' 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. While X held the majority vote to determine the final distribution of dividends, X may have chosen to distribute dividends to the classes of shares that X did not hold. The historical distribution of dividends is not taken into account when determining if a company had a significant individual at a point in time. Accordingly, while X was a significant individual and therefore a CGT concession stakeholder immediately before the CGT event, the company did not have any significant individuals for a period of time. Subsequently the requirement contained in paragraph 152-110(1)(c) of the ITAA 1997 has not been met.