The concept of a CGT concession stakeholder is fundamental to claiming a small business CGT concession involving a company or trust.
CGT Concession Stakeholder
The basic conditions for the small business CGT concessions get complicated around companies and trusts. And the CGT concession stakeholder is at the centre of it all. Whenever you want to claim a small business CGT concession involving a company or trust, you need a CGT concession stakeholder.
Concept
To understand the concept it helps to remember that the small business CGT concessions are aimed at the individual business owner. Not a company or trust.
But at the same time small business owners should be free to structure their business the way they see fit. So they shouldn’t lose out on concessions for using a company and/or trust structure. Hence the concept of the CGT concession stakeholder, tracing the company or trust back to the individual.
To determine who is or isn’t a CGT concession stakeholder, we need to look at three concepts – small business participation percentage, significant individual and then of course CGT concessions stakeholder.
# 1 Small business participation percentage
The small business participation percentage is to measure an individual’s interest in the company or trust.
So the small business participation percentage tries to trace the company or trust back to you as a natural individual person. What interest do you have? What rights to voting, capital and income distributions?
Direct Percentage
If you are the direct share or unit holder or beneficiary, then your participation percentage is straight forward. It is the lowest percentage of your voting and distribution rights.
Company
For a company s152-70 (1),
This percentage .. of holding …the voting power …or…any dividend ..or any distribution of capital ..or, if they are different, the smaller or smallest.
So non-voting shares would give you a participation percentage of zero.
Trust
For a fixed trust (including a unit trust) s152-70 (2),
The percentage of any distribution of income …or…capital …to which the entity would be beneficially entitled; or, if they are different, the smaller.
And for a non-fixed trust, for example a discretionary trust s152-70 (3):
…If the trustee makes distributions of income ..or…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.
So for non-fixed trusts, distributions in the year of the CGT event are crucial. You only have a direct participation percentage if there has been a distribution of capital or income (or both) to you during the year. It is the percentage you were beneficially entitled to for that year that matters, not what was actually paid.
Let’s say a hybrid trust does not distribute any capital, but does distribute $100k in income to which you are directly and/or indirectly beneficially entitled to $20k. You would have a participation percentage of 20%.
But now in addition to the income distribution the trust distributed $100 in capital to which you are directly and/or indirectly beneficially entitled to $10k, you would have a participation percentage of 10% (the smaller of the two potential participation percentages).
Indirect Percentage
How to calculate an individual’s indirect small business percentage you find in s152-75.
Work out the indirect small business participation percentage … by multiplying the holding entity‘s direct small business participation percentage ..in ..the intermediate entity …by…the intermediate entity‘s direct …and… indirect small business participation percentage (if any)…
The same concept applies to holdings further down the chain.
Here is the example that s152-75 uses: Bob Smith holds 80% in a private company. This company is the corporate beneficiary of a discretionary trust receiving 90% of the trust’s distributions. And this trust holds 60% of the units in a unit trust. So Bob’s participation percentage in the unit trust is: 80% x 90% x 60% = 43.2%
Total Percentage
The small business participation percentage is the sum of the direct and indirect interests. If Bob Smith also held 10% directly in the trust, his small business participation percentage would be 53.2%. So we now got the small business participation percentage. It really is just a numbers game.
# 2 Significant individual
So we now need to find the significant individuals. The ones the small business CGT concessions are meant to be for.
The magic number is 20%. A small business participation percentage of 20% or more makes you a significant individual. Or in the words of s152-55:
An individual is a significant individual … if…the individual has a small business participation percentage in the company or trust of at least 20%.
That’s it- 20%. Your small business participation percentage is either 20% or more and you are a significant individual. Or it is less and you are out.
# 3 CGT Concession Stakeholder
Every significant individual is a CGT concession stakeholder. But not every CGT concession stakeholder is a significant individual. And the reason is that the spouse of a significant individual is part of the mix.
The spouse of a significant individual is a CGT concession stakeholder if they hold a business participation interest of greater than zero. That’s all it takes. Greater than zero. A participation percentage of 0.000001% would be enough.
And so you could just say: CGT concession stakeholder = significant individual + spouse with > 0%. Or you could put it into a few more words as s152-60 does.
An individual is a CGT concession stakeholder … if the individual is a significant individual .. or a spouse of a significant individual, if the spouse has a small business participation percentage …greater than zero.
And so now you have your CGT concession stakeholders. Whenever there is a company or trust involved, you will need a CGT concession stakeholder. But now you know how to find them.
MORE
Affiliates and Connected Entities
Super is Not Part of Your Estate
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.