Private ruling: Small Business CGT Concessions - Significant Individual Test
Date of advice: 30 May 2017
Published: September 2017
Ruling period: Year ended 30 June 2017

Ruling: Q1: Do you satisfy the significant individual test for the purposes of the small business CGT concessions? | A1: No

Relevant facts and circumstances: The company purchased the property over 25 years ago. The company held a special meeting at which it resolved that the A class shareholders would be entitled to one vote for each share held and all other classes of shares would not have any voting rights conferred upon them. The only rights the holders of the other classes of shares would have, is the right to receive dividends as determined by the Directors of the company from time to time in respect of each such class of shares. At the same meeting you were appointed Governing Director of the company with complete control of the company affairs vested in you and you have continued in that role up to and including the present. You hold all the A class and B class shares. A meeting of the directors of the company was convened and a resolution was passed to allocate C and D class shares and ordinary shares to other shareholders. There are no records in the accounts of the company nor in its Constitution about the rights of the ordinary shares, A, B, C, and D as issued in the company particularly in the event of winding up the company. No dividends have been paid by the company since its incorporation. You continue to operate your business on the property and do so as a sole trader. You pay an annual fee for use of the property to the company. You consider that you are a 'small business entity' as your and the company's combined annual turnover is less than $2,000,000. The following are extracts from the Memorandum of Association of the company: X. (a) If at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by terms of issue of the shares of that class) may, whether or not the company is being wound up, be varied with the consent in writing of the holders of three-quarters of the issued shares of that class, or with the sanction of a special resolution passed at a separate meeting of the holders of the shares of the class. YY. (a) The company in general meeting may declare a dividend if, and only if the directors have recommended a dividend. WW. The directors may authorise the payment by the company to the members of such interim dividends as appear to the directors to be justified by profits of the company. ZZ. (a) If the company is wound up, the liquidator may with the sanction of a special resolution, divide among the members in kind the whole or any part of the property of the company and may for that purpose set such value as they considers fair upon property to be so divided and may determine how the division is to be carried out as between the members or different classes of members.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 152-10 | 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 152-70

Reasons for decision: Summary: For small business CGT events that happen in the 2006/07 income year or later income years, section 152-50 of the ITAA 1997 prescribes a "significant individual test" in consideration to the small business concessions. This is one of the basic requirements for relief set out in subsection 152-10(2) of the ITAA 1997 that must be satisfied before you are entitled to the small business relief under Division 152 of the ITAA 1997. The significant individual test qualifies you as a CGT concession stakeholder in respect to your shareholdings in a company (section 152-60 of the ITAA 1997). A company satisfies the significant individual test if the company had at least one significant individual just before the CGT event. "Significant individual" is defined in section 152-55 of the ITAA 1997 as: An individual is a significant individual in a company or a trust at a time if, at that time, the individual has a *small business participation percentage in the company or trust of at least 20%. As you personally hold shares in the company, your participation in the company falls under the direct participation guidelines tabled in section 152-70 of the ITAA 1997. Your direct small business participation percentage in the company is the percentage that you have from the holding of the legal and equitable interests in the company's shares, as determined by: (a) the percentage of the voting power in the company (b) the percentage of any dividend that the company may pay (c) the percentage of any distribution of capital that the company may make. If these amounts are different, the smallest amount is used. | Detailed Reasoning - Voting Power: You have indicated that the voting power of your total shareholding in the company is greater than 20% at 100%, because it was resolved that the A Class shareholders would be entitled to one vote for each share held and all other classes of shares would not have any voting rights conferred upon them. You hold all the A class shares. | Detailed Reasoning - Entitlement to dividends: The Memorandum of Association of the company states at: Paragraph (a) of Clause YY The company in general meeting may declare a dividend if, and only if the directors have recommended a dividend. Clause WW The directors may authorise the payment by the company to the members of such interim dividends as appear to the directors to be justified by profits of the company. You have indicated that: “The only rights the holders of the other classes of shares would have, is the right to receive dividends as determined by the Directors of the company from time to time in respect of each class of shares.” No dividends have ever been paid by the company. The Commissioner's view on this issue is set out in Taxation Determination TD 2006/77. Based on this TD and the information you have provided, there is no specific individual who has the right to receive at least 20% of any dividend distribution the company may make. For example if the decision was to make dividends payable to the C and D class shareholders you would not receive any dividends so your entitlement would be 0%. There is no one shareholder that has a right to at least 20% of any dividend distribution that the company may make. They may receive more than 20% or not receive anything at all depending on how the director exercises his discretion, but nobody has a right to a certain percentage. | Detailed Reasoning - Entitlement to capital: Paragraph (a) of Clause X of the Memorandum of Association states: “If at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by terms of issue of the shares of that class) may, whether or not the company is being wound up, be varied with the consent in writing of the holders of three-quarters of the issued shares of that class, or with the sanction of a special resolution passed at a separate meeting of the holders of the shares of the class.” Paragraph (a) of Clause ZZ of the Memorandum of Association states: “If the company is wound up, the liquidator may with the sanction of a special resolution, divide among the members in kind the whole or any part of the property of the company and may for that purpose set such value as he considers fair upon property to be so divided and may determine how the division is to be carried out as between the members or different classes of members.” You have stated that: “There are no records in the accounts of the company nor in its Constitution about the rights of the ordinary shares, A, B, C, and D class shares as issued in the company, particularly in the event of winding up the company.” There is no one shareholder including yourself who has 100% of the voting power, who has a right to at least 20% of any distribution of capital that the company may make. It is possible for any shareholder to get at least 20% of any capital distribution, but it is contingent on some other event happening. Your entitlement to dividends and any capital distribution from the company represents the smallest participation percentage of the three participation percentage measures, therefore, making these the 'determining' measures for section 152-70 of the ITAA 1997. As your participation percentage for these two measures is less than the 20% requirement tabled in section 152-70 of the ITAA 1997, you are not a significant individual of that company.