An individual is a significant individual in a company or trust if they have a small business participation percentage in the company or trust of at least 20%. The 20% can be made up of direct and indirect percentages.
A company or trust satisfies the significant individual test if it had at least one significant individual just before the CGT event. The small business 15-year exemption further requires a company or trust to have a significant individual for periods totalling at least 15 of the years of ownership of the CGT asset.
The significant individual test is not the same as the control tests used to determine if an entity is 'connected with' another entity for the purposes of the $6 million maximum net asset value test or the $2 million aggregated turnover test.
End of attentionTotal small business participation percentage
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, and
- the entity's indirect small business participation percentage in the other entity at that time.
Direct small business participation percentage
Companies
An entity's direct small business participation percentage in a company is the percentage of:
- voting power that the entity is entitled to exercise
- any dividend payment that the entity is entitled to receive, or
- any capital distribution that the entity is entitled to receive.
As with the significant individual test, the participation percentage can be held directly or indirectly through one or more interposed entities.
If an entity has different participation percentages in a company, their participation percentage is the smaller or smallest percentage. The same applies for a trust.
All classes of shares (other than redeemable shares) are taken into account in determining an entity's participation percentage in a company.
Example
Joe owns shares that entitle him to 30% of any dividends and capital distributions of Company X. The shares do not carry any voting rights.
Joe's direct small business participation percentage in Company X is 0%.
Example
A company has two different classes of shares, A and B, which have equal voting and distribution rights. Isaac holds 20% of the shares of each class. The directors can decide to make a distribution of income or capital to either class of shares to the exclusion of the other class of shares.
In this situation, the company does have a significant individual. Isaac holds 20% of the voting power and, regardless of how the directors' discretion is exercised, Isaac will always receive 20% of any distribution made by the company.
However if Isaac only held the class A shares and no class B shares, he would not be a significant individual. His right to receive the distribution is only notional, and dependant on how the directors exercise their discretion to make distributions.
Trusts
An entity's direct small business participation percentage in a trust, where entities have entitlements to all the income and capital of the trust, is the percentage of:
- the income of the trust that the entity is beneficially entitled to receive, or
- the capital of the trust that the entity is beneficially entitled to receive.
An entity's direct small business participation percentage in a trust, where entities do not have entitlements to all the income and capital of the trust, and the trust makes a distribution of income or capital, is the percentage of:
- distributions of income that the entity is beneficially entitled to during the income year, or
- distributions of capital that the entity is beneficially entitled to during the income year.
If the trust did not make a distribution of income or capital during the income year it will not have a significant individual during that income year.
End of attentionIndirect small business participation percentage
An entity's indirect small business participation percentage in a company or trust is calculated by multiplying together the entity's direct participation percentage in an interposed entity, and the interposed entity's total participation percentage (both direct and indirect) in the company or trust.
ABC Trust owns 100% of the shares in Operating Co. Therefore, ABC Trust has a 100% direct interest (and no indirect interest) in Operating Co.
Jennifer receives 80% of the distributions from ABC Trust. Therefore, she has a direct participation percentage of 80% in ABC Trust.
To find Jennifer's participation percentage in Operating Co, multiply Jennifer's direct participation percentage in ABC Trust and ABC Trust's total participation percentage in Operating Co.
80% x 100% = 80%
Jennifer has an 80% participation percentage in Operating Co and is, therefore, a significant individual of Operating Co.
Bill received 15% of the distributions from ABC Trust. Therefore, he has a direct participation percentage of 15% in ABC Trust.
To find Bill's participation percentage in Operating Co, multiply Bill's direct participation percentage in ABC Trust and ABC Trust's total participation percentage in Operating Co.
15% x 100% = 15%
Bill has a 15% participation percentage in Operating Co and is, therefore, not a significant individual of Operating Co.
(As a spouse of a significant individual with a participation percentage greater than zero in the entity, Bill will be a CGT concession stakeholder).
Nicky receives 5% of the distributions from ABC Trust. Therefore, she has a direct participation percentage of 5% in ABC Trust.
To find Nicky's participation percentage in Operating Co, multiply Nicky's direct participation percentage in ABC Trust and ABC Trust's total participation percentage in Operating Co.
5% x 100% = 5%
Nicky has a 5% participation percentage in Operating Co and is, therefore, not a significant individual of operating Co. (Nicky is not a CGT concession stakeholder).
An indirect interest can be held through one or more interposed entities.
End of attention