For the purposes of calculating the direct participation percentage in section 152-70 of the Income Tax Assessment Act 1997 (ITAA 1997), is the Trust a trust where entities do not have entitlements to all of the income and capital of the trust (item 3 of the table)?
Yes. This ruling applies for the following periods : Year ending 30 June 2026 Year ending 30 June 2027 The scheme commenced on: 1 July 2025
You are a unitholder in the Trust. The Trust has both ordinary units and special units The trust deed for the Trust states that: • the issue of an ordinary unit entitles the ordinary unit holder to participate equally in respect of that ordinary unit with all other ordinary units in all distributions of income to the ordinary unit holders subject to the entitlements (if any) of special unit holders (if any). • the issue of a special unit entitles the special unit holder to participate at the discretion of the Trustee in any distribution of income to the special unit holders. Such income distributions need not be made proportionally between the special unit holders but may be made in favour of one to the exclusion of any or all of the others and irrespective of the actual number of special units held
Income Tax Assessment Act 1997 section 152-55 Income Tax Assessment Act 1997 section 152-65 Income Tax Assessment Act 1997 section 152-70
An individual is a significant individual of a trust if at that time, the individual has a small business participation percentage in the trust of at least 20% (section 152-55 of the ITAA 1997). The small business participation percentage is the sum of the entity's direct and indirect percentage (section 152-65 of the ITAA 1997). Table 1: section 152-70 of the ITAA 1997 provides that an entity holds a direct small business participation percentage at the relevant time in an entity equal to the percentage worked out using this table Not Applicable In this entity: Is: 1 ... 2 A trust (where entities have entitlements to all the income and capital of the trust) This percentage: (a) the percentage of any distribution of income that the trustee may make to which the entity would be beneficially entitled; or (b) the percentage of any distribution of capital that the trustee may make to which the entity would be beneficially entitled; or, if they are different, the smaller. 3 A trust (where entities do not have entitlements to all the income and capital of the trust) This percentage: (a) if the trustee makes distributions of income during the income year (the
relevant year ) in which that time occurs - the percentage of the distributions to which the entity was beneficially entitled; or (b) if the trustee makes distributions of 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 Relevantly, for the purposes of section 152-70 of the ITAA 1997, for a trust, where entities have entitlements to all the income and capital of the trust (fixed trust), an entity's direct small business participation percentage is the percentage of the income and 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 (discretionary trust), if the trust made a distribution of income or capital, is the percentage of distributions of income and capital that the entity is beneficially entitled to during the income year.
For the purposes of section 152-75 of the ITAA 1997, 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. ATO Interpretative Decision ATO ID 2015/8 Income tax: CGT small business concessions: small business participation percentage - trust where entities have entitlement to all income and capital of the trust explains the Commissioner's approach to determining entitlement to trust income and capital for the purposes of determining an individual's small business participation percentage. Although 'income' is not relevantly defined, in context, it has the meaning which it has for the purposes of the general law of trusts (see e.g. ATO Interpretative Decision ATO ID 2012/99 Income Tax Capital gains tax - direct small business participation percentage in a trust - meaning of 'distributions of income' and capital ). Similarly, it is considered that 'capital' has the meaning which it has for the purposes of the general law of trusts.
Accordingly, a determination of whether a trust is an entity to which item 2 or item 3 of the table in subsection 152-70(1) of the ITAA 1997 applies, depends on whether or not, on a proper construction of the trust instrument, there is any amount of income or capital of the trust to which no beneficiary is entitled at the relevant time. The 'relevant time' (as that phrase is used in subsection 152-70(1) of the ITAA 1997) for making the determination is, with respect to the additional basic conditions, 'just before the CGT event' (subsection 152-10(2) of the ITAA 1997). Accordingly, a trust instrument which gives the trustee discretion to appoint or distribute income or capital to one or more of a class of beneficiaries is a trust where entities do not have entitlements to all the income and capital of the trust. Although entities may become entitled to the income and capital of the trust as a result of the exercise of the trustee's discretion, those entitlements do not exist prior to that time.
Whilst every case will turn on a proper construction of the trust instrument, the power in the trustee to accumulate income of the trust may not of itself cause the trust to be one in which beneficiaries do not have entitlements to all the income and capital of the trust. Generally, an accumulation clause gives the trustee a power to effectively cause part of the income of the trust estate to be capital of the trust estate. Provided that, under the trust instrument, one or more beneficiaries has, at the relevant time, an entitlement to all of the income and capital of the trust, including any accumulated income or capital, the trust will be a trust to which item 2 of the table in subsection 152-70(1) of the ITAA 1997 applies. For the purposes of determining whether or not a trust is a trust to which item 2 or item 3 of the table in subsection 152-70(1) applies, it does not matter whether the same beneficiary or beneficiaries have an entitlement to the accumulated income or capital.
In this case the Commissioner considers that pursuant to the trust deed, the trustee has the discretion to appoint or distribute income to one or more of the special unitholders. Consequently, entities do not have entitlements to all the income and capital of the trust. Therefore, for the purposes of determining the direct participation percentage, the Trust is an entity to which item 3 of the table in subsection 152-70(1) of the ITAA 1997 applies.