The topic of this article concerns a niche but very commonly questioned aspect of the the small business CGT concessions – the availability of the concessions where there is a disposal or other CGT event over shares in a company or interests in a trust. This article sets out the conditions of eligibility for a taxpayer looking to dispose of shares or trust interests.
A quick word on conditions of eligibility. You will note that that the basic conditions concerning active assets which are not shares in a company or interests in a trust will continue to apply. However, there are several ‘additional’ basic conditions that have application for CGT events occurs from 8 February 2018.
*Note that the below condition 4 and 5 are the additional basic conditions and condition 2 and 3 are modified versions of the basic conditions.
- A CGT event happens in relation to the share or trust interest that results in a capital gain
- The taxpayer satisfies either the maximum net asset value ‘MNAV’ test or is carrying on a business just before the CGT event
- The CGT asset is an active asset under modified rules
- The object entity must satisfy the small business entity ‘SBE’ test or the MNAV test under modified rules that deem an entity a ‘connected entity’ based on a 20% control test.
- The taxpayer was a CGT concession stakeholder in the object entity or CGT concession stakeholders in the object entity together have a small business participation percentage in the taxpayer of at least 90%
Taxpayer = the entity which disposes of the shares or trust interests and is to looking to utilise the small business CGT concessions.
Object entity = the company or trust which the taxpayer holds shares or trust interests in.
Further entity or entities = an entity or entities which the object entity holds shares or interests in.
CGT concession stakeholder = natural person with a 20% or greater small business participation percentage in the object entity, or the spouse of such a person provided the spouse holds some interest in the object entity themselves.
Small business participation percentage ‘SBPP’ = the sum of direct SBPP and indirect SBPP held in another entity. In respect of a company, the SBPP is the smallest of the entity’s percentage entitlement to dividends, capital and voting power. In respect of a trust (other than a discretionary trust), it is the smallest of the rights to capital and income distributions. In respect of a discretionary trust, it is the smallest of the entity’s percentage share of distributions of capital and income for the relevant income year.
First condition: A CGT event happens in relation to the share or trust interest that results in a capital gain
Second condition: The taxpayer satisfies either the MNAV test or is carrying on a business before the CGT event
This condition is a slight modification to the standard basic condition that applies when we are not dealing with shares or interests. Specifically, under this condition it is not necessary for the taxpayer to be a ‘small business entity’ i.e. an entity with an aggregated turnover of less than $2 million.
Third condition: The CGT asset is an active asset under modified rules
Essentially, 80% of the total market value of all company or trust assets must be active assets in order for the shares or interests in the object entity to be considered ‘active assets’. Note that the 80% test must be satisfied for a minimum of: (i) 7.5 years, or (ii) half the period of the time the taxpayer owned the share or interest.
There a few special rules to keep in mind here. In particular, note that where the object entity itself has shares or interests in another entity (a ‘further entity’), the value of those shares or interests is excluded from total assets.
Instead, the market value of the assets of that later entity multiplied by the object entity’s SBPP in that later entity will be added to the object entity’s total assets. The assets of the later entity will only be considered ‘active’ if the later entity is itself a CGT small business entity or satisfies the MNAV test (under slightly modified versions of those tests) AND the taxpayer is a CGT concession stakeholder in that further entity.
For example, take Abbie and Magnolia (taxpayers) who are considering selling shares held in Abbie Pty Ltd (object entity). Abbie Pty Ltd (object entity) itself holds shares in Tom Pty Ltd (further entity). The value of shares Abbie Pty Ltd holds in Tom Pty Ltd will be excluded in calculating the total market value of assets in Abbie Pty Ltd.
Instead, the market value of the assets of Tom Pty Ltd multiplied by the SBPP of Abbie Pty Ltd in Tom Pty Ltd will be used to calculate the total market value of assets of Abbie Pty Ltd as the object entity. At least 80% of the total assets of Abbie Pty Ltd (incorporating the relevant percentage of Tom Pty Ltd’s total assets) must be considered ‘active’.
Whether the incorporated assets held by Tom Pty Ltd are considered ‘active’ depends on a number of factors including whether Tom Pty Ltd is itself a small business entity or satisfies the MNAV test under modified versions of those tests.
Fourth condition: The object entity must satisfy the SBE test or the MNAV test under modified rules
This includes turnover / net assets of affiliates and connected entities. Regarding the connected entities test, ‘control’ is based on a 20% connection instead of 40%. 40% is the control threshold under the basic conditions for standard active assets.
The means of assessing the level of control varies depends on the type of entity being referred to. For a company, control is determined by reference to either rights to voting, dividend income and / or capital distributions. For a discretionary trust, control is determined by reference to a distributions test or influence over trustee test.
The distributions test considers historic distributions of income and capital from the trust to beneficiaries. Essentially, a beneficiary will be connected with a discretionary trust where – for any income year within the past 4 years prior to the current income year – that beneficiary has received a distribution of income or capital from the trust in excess of 20% of the total income or capital for that particular income year. Note the turnover or assets of entities that control the object entity are disregarded.
Fifth condition: The taxpayer was a CGT concession stakeholder in the object entity OR CGT concession stakeholders in the object entity together have a small business participation percentage in the taxpayer of at least 90%.
If the taxpayer is a natural person, they will satisfy the condition where:
- they have a SBPP in the object entity of at least 20%; or
- they are the spouse of such a person; and
- they have a SBPP in the object entity which is greater than nil.
For example, Tom and Magnolia every year receive 50% of trust income. They both have a SBPP in the trust exceeding 20% and therefore both qualify as CGT concession stakeholders in the object entity.
If the taxpayer is a company or trust, the CGT concession stakeholders of the object entity must together have a SBPP in the taxpayer of at least 90%.
For example, the Magnolia Discretionary Trust holds 90% of the shares in private company, Abbie Pty Ltd. As per the last example, the trustee of the Magnolia Discretionary Trust has historically distributed 50% of trust income to Magnolia and 50% of trust income to Tom.
In this scenario, the CGT concession stakeholders of Abbie Pty Ltd (object entity) include Tom and Magnolia as they both have an SBPP of 45% (50% interest in trust x 90% interest of trust in company) in Abbie Pty Ltd.
The next step is then to check whether Tom & Magnolia, as CGT concession stakeholders in Abbie Pty Ltd (object entity), have a small business participation in the Magnolia Discretionary Trust (taxpayer) of at least 90%.
In this case, Tom & Magnolia both have a SBPP of 50% in the Magnolia Family Trust. Therefore, CGT concession stakeholders (Tom & Magnolia) of the object entity (Abbie Pty Ltd) have a combined SBPP in the taxpayer (Magnolia Family Trust) of 100%. This exceeds the 90% requirement. The fifth and final condition is satisfied.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.