Relevance

The term small business participation percentage is relevant to the basic requirements which need to be satisfied to gain access to the Small Business CGT Concessions and also to the specific requirements which need to be satisfied to gain access to the small business 15-year exemption and the small business retirement exemption in certain circumstances.

In particular, the term small business participation percentage is relevant to:

1. The definitions of significant individual and CGT concession stakeholder;

2. The Active Asset Test where the CGT asset is a share in a widely held company or a unit in a widely held unit trust;

3. Two of the four additional tests for shares in a company or units in a unit trust;

4. The small business 15-year exemption for individuals where the CGT asset is a share in a company or a unit in a unit trust;

5. The small business 15-year exemption for companies and trusts;

6. The small business retirement exemption for companies and trusts; and

7. CGT events J5 and J2 where the small business roll-over has been chosen and the replacement asset is a share in a company or a unit in a unit trust.

Calculation

In broad terms, the small business participation percentage is calculated as the sum of the direct and indirect percentage interests an entity has in another entity.

How this is calculated depends upon whether the other entity is a company, a fixed trust or a non-fixed trust.

Companies

For a company, the small business participation percentage is calculated as the sum of the direct and indirect percentage interests an entity has in the voting power, any dividend and any distribution of capital of the company, or where they are different the lessor of the three.

When doing this calculation, only the voting power, dividends and distributions of capital of the company that arise from shares in the company are counted ignoring redeemable shares.  So rights attaching to redeemable shares and special rights that might be found in a shareholder’s agreement do not count in the calculation.

Also, the voting power test does not apply where the relevant shares are held jointly with another entity.

Fixed trusts

For a fixed trust, the small business participation percentage is calculated as the sum of the direct and indirect percentage interests an entity has in any distribution of income and any distribution of capital of the fixed trust, or where they are different the lessor of the two. 

Non-fixed trusts

For a non-fixed trust, the small business participation percentage is calculated as the sum of the direct and indirect percentage interests an entity has in any distribution of income and any distribution of capital of the non-fixed trust during the relevant income year, or where they are different the lessor of the two.

However, if the non-fixed trust does not make a distribution of income or capital during the relevant income year, the test is applied instead to the CGT event year, or if no such distributions occurred in the CGT event year, the test is applied instead to the last tax year before the CGT event year in which the trustee did make such a distribution.

But regardless, if the non-fixed trust does not make a distribution of income or capital during the relevant income year, an entity should have a direct small business participation percentage in the non-fixed trust of nil if either:

1. The trust had a net income but not a tax loss for the relevant year; or

2. The trustee did not make a distribution of income or capital at any time before the end of the CGT event year.

Another way of saying that, although not as precise, is that an entity should have a direct small business participation percentage in the non-fixed trust of nil if either:

1. The trust had net income after tax losses but didn’t distribute that net income; or

2. The trust never made a distribution.

Disclaimer – The above is intended as commentary and general information only.  It should not be relied upon as taxation advice.  Formal taxation advice should be sought for particular transactions or on matters of interest arising from the above.