The basic conditions for small business CGT (SBCGT) relief are as follows:
- a CGT event happens to a CGT asset of yours;
- but for any SBCGT relief, the CGT event would have resulted in a gain;
- you satisfy one of various alternatives, including:
- you are a CGT small business entity; or
- you satisfy the maximum net asset value test; and
- the CGT asset satisfies the active asset test.
However, there are separate and additional basic conditions where the relevant CGT asset(s) are shares in a company or interests (including units) in a trust, including:
- you are a CGT concession stakeholder in the object entity (i.e., the company or trust whose interests you disposed of), described here as the Direct Test; or
- CGT concession stakeholders in the object entity together have a small business participation percentage (SBPP) in you of at least 90%, described here as the 90% Test.
Who/what is “you”?
As outlined above, the additional basic conditions for SBCGT relief refer to “you” having to be a CGT concession stakeholder in the object entity or CGT concession stakeholders together having an SBPP in “you” of at least 90%.
In this regard, “you” refers to the equity holder in the object entity who triggered the relevant CGT event (e.g., disposed of the shares or units) and is seeking to access SBCGT relief.
What is a CGT concession stakeholder?
A CGT concession stakeholder means:
- a significant individual in the object entity; or
- the spouse of a significant individual with an SBPP in the object entity of more than nil.
What is a significant individual?
An individual is a significant individual in a company or a trust if, at that time, the individual has an SBPP in the company or trust of at least 20%.
What is SBPP?
SBPP is the sum of both direct and indirect SBPP.
In relation to companies, direct SBPP refers to the percentage of voting power, dividend rights or capital rights an entity holds as a shareholder (and, if these rights differ, the smaller or smallest of them).
It is important to note that redeemable shares (as defined) are excluded for present purposes.
In relation to fixed trusts, direct SBPP refers to the percentage of income or capital to which a beneficiary is beneficially entitled (and, if these rights differ, the smaller of them).
In relation to discretionary trusts, direct SBPP is the percentage of income or capital that the trustee distributed to the relevant beneficiary during the relevant income year (and if these percentages differ, the smaller), however, specific rules apply where a trustee does not make a distribution of either income or capital in a relevant income year, that is, we take the distributions in either:
- the CGT event year; or, if there were no such distributions,
- the last income year before the CGT event year in which the trustee made a distribution of income or capital.
Notwithstanding the above, an entity will have a direct SBPP of nil if a discretionary trust:
- had net income for the relevant income year and did not have a tax loss for the income year; or
- did not make any distribution of income or capital at any time before the end of the CGT event year.
Indirect SBPP is determined by multiplying the holding entity’s direct SBPP by the sum of an intermediary’s direct and indirect SBPP in a lower-tier entity.
What does the 90% Test mean?
It is important to remember that only individuals can be CGT concession stakeholders.
Therefore, if an individual is a CGT concession stakeholder in a company or trust and disposes of equity interests they held directly, the Direct Test applies and the 90% Test is irrelevant for present purposes.
In the diagram below, assume that “A”, “B”, “C” and “D” are otherwise unrelated third parties except “C” and “D” are spouses.
Applying the SBCGT rules to the facts at hand:
- each shareholder separately assesses their eligibility for SBCGT relief;
- as “A” and “B” hold their shares in the Company directly, the Direct Test applies to them;
- as the Family Trust holds shares in the Company and it is not an individual, the 90% Test applies to it;
- “C” and “D” are CGT concession stakeholders of the Company based on their indirect SBPP of 25% each (50% x 50%); and
- as “C” and “D” each received 50% of the distributions of the Family Trust:
- they have a direct SBPP of 50% each in the Family Trust; and
- together they have a direct SBPP in the Family Trust of 100%,
such that the 90% Test is satisfied.
If, for example, the Family Trust instead distributed the trust income to “C” (50%), “D” (30%) and another beneficiary, “E” (20%):
- “C” would still be a CGT concession stakeholder in the Company with an SBPP of 25% (50% x 50%);
- “D” would still be a CGT concession stakeholder in the Company notwithstanding they are now under the general 20% threshold as they:
- are “C’s” spouse (who is a CGT concession stakeholder); and
- have an SBPP of 15% (50% x 30%), which is more than nil; and
- “E” would not be a CGT concession stakeholder with an SBPP of only 10% (50% x 20%).
Notwithstanding that “C” and “D” are CGT concession stakeholders in the Company, the Family Trust cannot satisfy the 90% Test as “C” and “D” have a collective SBPP in it of only 80% (which is less than the minimum 90% required).
For SBCGT purposes, the 90% Test applies whenever shares in a company or interests (including units) in a trust are held through interposed entities and disposed of by the relevant taxpayer.
Particularly in relation to interposed discretionary trusts, it is critical to ensure that distributions are made to facilitate access to SBCGT relief not only with regards to CGT concession stakeholder status in the underlying object entity, but also the required collective interest of CGT concession stakeholders in the trust for the purposes of the 90% Test.
For more information on the SBCGT concessions, please see our Explainer video here.
If you would like to discuss this issue, or any other eligibility issues surrounding the SBCGT concessions and how you, or your clients, can benefit from them, contact Mosaic Tax Legal at firstname.lastname@example.org or 1300 115 841.