Private ruling: CGT concession stakeholder
Date of advice: 20 November 2020
Published: January 2021
Ruling period: 1 July 2020 to 30 June 2021

Ruling: Q1: For the purposes of paragraph 152-10(2)(d) of the of the Income Tax Assessment Act 1997 [1], will Mr B be a CGT concession stakeholder in the Holding Trust and have a small business participation percentage in the B Family Trust of at least 90% just before the B Family Trust disposes of its units in the Holding Trust? | A1: Yes

Relevant facts and circumstances: The B Family Trust is a discretionary trust which owns 50% of the ordinary units in the Holding Trust, along with 100% of the B class units which entitle the B Family Trust to receive a rateable proportion of the income of the Holding Trust as the trustee in its absolute discretion appoints. Family Trust A is controlled by Mr B's business partner. Family Trust A owns 50% of the ordinary units in the Holding Trust, along with 100% of the D class units which entitle it to receive such proportion of the income of the Holding Trust as the trustee in its absolute discretion appoints. Since the establishment of all entities, the trustee of the Holding Trust has not made a distribution of income on the B class units held by the B Family Trust, nor has the trustee of the Holding Trust made any distributions of capital on any issued unit. On average, the B Family Trust has received approximately 41% of the income entitlements from the Holding Trust and never less than 30% of the Holding Trust's annual income in any year. This distribution to the B Family Trust equates to its share of income distributed to the ordinary unitholders. The Holding Trust owns 100% of the ordinary units in the AB Unit Trust. There are no other units on issue in the AB Unit Trust. The Holding Trust is a non-fixed trust on the basis the unitholders do not have entitlements to all the income and capital of the trust. The AB Unit Trust is a unit trust which carries on a commercial business. The trustee of the Holding Trust has never made any distributions of capital. The units held by the B Family Trust in the Holding Trust are the only assets owned by the B Family Trust. It is proposed that the B Family Trust will dispose of all its units in the Holding Trust to a newly created discretionary trust prior to 30 June 2021. In the 2021 income year, the B Family Trust will make a capital gain from the disposal. The trustee of the B Family Trust is expected to distribute 100% of its income for the 2021 income year to Mr B and is not expected to make any distributions of capital during the 2021 income year. It is estimated that the B Family Trust will receive approximately 40% of the income distributed by the Holding Trust during the 2021 income year. The trustee of the Holding Trust is not expected to make any distributions of capital during the 2021 income year. Both the B Family Trust and the Holding Trust are a 'resident trust for CGT purposes', as per the definition of that term in section 995-1. Assumptions 1. During the 2021 income year, the trustee for the Holding Trust will make distributions of income (determined according to general law of trusts) and the B Family Trust will be made beneficially entitled to at least 20% of those distributions. 2. If, during the 2021 income year, the trustee for the Holding Trust makes distributions of capital, the B Family Trust will be made beneficially entitled to at least 20% of those distributions. 3. During the 2021 income year, the trustee for the B Family Trust will make distributions of income (determined according to general law of trusts) and Mr B will be made beneficially entitled to 100% of those distributions. 4. If, during the 2021 income year, the trustee for the B Family Trust makes distributions of capital, Mr B will be made beneficially entitled to 100% of those distributions.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 152-10 | Income Tax Assessment Act 1997 subsection 152-10(2) | Income Tax Assessment Act 1997 paragraph 152-10(2)(d) | Income Tax Assessment Act 1997 subparagraph 152-10(2)(d)(ii) | Income Tax Assessment Act 1997 section 152-55 | Income Tax Assessment Act 1997 section 152-60 | Income Tax Assessment Act 1997 paragraph 152-60(a) | 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 section 152-75 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: For the purposes of paragraph 152-10(2)(d), Mr B will be a CGT concession stakeholder in the Holding Trust and have a small business participation percentage in the B Family Trust of at least 90% just before the B Family Trust disposes of its units in the Holding Trust. | Detailed Reasoning - Detailed reasoning: The B Family Trust's units in the Holding Trust are CGT assets under section 108-5. A capital gain made on the transfer of the B Family Trust's units in the Holding Trust may be reduced or disregarded if the basic conditions under section 152-10 are satisfied for the gain. Additional basic conditions under subsection 152-10(2) apply where the relevant CGT asset is a share in a company or interest in a trust. Specifically, paragraph 152-10(2)(d) provides: just before the CGT event, either: (i) you are a *CGT concession stakeholder in the object entity; or (ii) CGT concession stakeholders in the object entity together have a *small business participation percentage in you of at least 90%. The meaning of 'CGT concession stakeholder' is set out in section 152-60. Section 152-60 states: An individual is a CGT concession stakeholder of a company or a trust at a time if the individual is: (a) a *significant individual in the company or trust; or (b) a spouse of a significant individual in the company or trust, if the spouse has a *small business participation percentage in the company or trust at that time that is greater than zero. Section 152-55 defines a 'significant individual' as follows: 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%. Section 152-65 states that an entity's small business participation percentage in another entity at a time is the percentage that is the sum of the entity's direct small business participation percentage in the other entity at that time (as provided for by section 152-70) and the entity's indirect small business participation percentage in the other entity at that time (as provided for by section 152-75). Relevantly, item 3 of the table in subsection 152-70(1) provides that an entity's direct small business participation percentage at the relevant time in a non-fixed trust is determined as follows: (a) if the trustee makes distributions of income during the income year (the relevant year ) in which that time occurs - the percentage of the distributions to which the entity was beneficially entitled; or (b) if the trustee makes distributions of capital during the relevant year - the percentage of the distributions to which the entity was beneficially entitled; or, if 2 different percentages are applicable, the smaller. Section 152-75 provides that an entity's indirect small business participation percentage in a company or trust at a particular time is determined by multiplying the entity's direct small business participation percentage in another entity (the 'intermediate entity') at that time, and the intermediate entity's direct and indirect small business participation percentage in the company or trust at that time. As: • the B Family Trust (being the relevant intermediate entity for the purposes of • section 152-75) is a non-fixed trust; • it is assumed for the purposes of this ruling that the trustee of the B Family Trust will make distributions of income during the 2021 income year and Mr B will be made beneficially entitled to 100% of those distributions; and • it is assumed for the purposes of this ruling that Mr B will be made beneficially entitled to 100% of any distributions of capital made by the trustee of the B Family Trust during the 2021 income year (should any such distributions be made), Mr B's direct small business participation percentage in the B Family Trust just before the B Family Trust's disposal of its units in the Holding Trust during the 2021 income year will be 100%, in accordance with item 3 of the table in subsection 152-70(1). As: • the Holding Trust is a non-fixed trust; • it is assumed for the purposes of this ruling that the trustee of the Holding Trust will make distributions of income during the 2021 income year and the B Family Trust will be made beneficially entitled to at least 20% of those distributions; and • it is assumed for the purposes of this ruling that the B Family Trust will be made beneficially entitled to at least 20% of any distributions of capital made by the trustee of the Holding Trust during the 2021 income year (should any such distributions be made), the B Family Trust's direct small business participation percentage in the Holding Trust just before the B Family Trust's disposal of its units in the Holding Trust during the 2021 income year will be at least 20%, in accordance with item 3 of the table in subsection 152-70(1). Therefore, pursuant to section 152-75, Mr B's indirect small business participation percentage in the Holding Trust just before the B Family Trust's disposal of its units in the Holding Trust, determined by multiplying his direct small business participation percentage of 100% in the B Family Trust at that time and the B Family Trust's direct small business participation percentage of at least 20% in the Holding Trust at that time, will be at least 20%. With an indirect small business participation percentage in the Holding Trust of at least 20% at that time, Mr B will be a significant individual in the Holding Trust pursuant to section 152-55 and, accordingly, a CGT concession stakeholder of the Holding Trust pursuant to paragraph 152-60(a). As a CGT concession stakeholder in the Holding Trust (the relevant 'object entity' for the purposes of paragraph 152-10(2)(d)) that has a small business participation percentage in the B Family Trust of at least 90% (i.e. 100%) just before the CGT event, the B Family Trust will satisfy the additional basic condition under subparagraph 152-10(2)(d)(ii). [1] All legislative references are to the Income Tax Assessment Act 1997 .