Facts
A company is 100% owned by an individual. There are 100 issued ordinary shares at $1 each. The current share value is $250,000. The individual wishes the family trust to be a shareholder.
Question
What are the options and applicable tax considerations?
Tax Tips
Scenario 1 The company could issue 149 ordinary shares, at $1 each, to the family trust with $nil tax implications (Share Issue). This will cause a value shift under Division 725 ITAA 1997 because the individual’s shares, pre-Share Issue, was valued at $250,000 (being 100 ordinary shares / 100 ordinary shares x $250,000) but, post-Share Issue, is valued at $100,401 (being 100 ordinary shares / 249 ordinary shares x $250,000). The value shift amount is $149,598. However, a special rule under section 725-70 (about consequences for down interest only if there is a material decrease in its market value) provides that all value shifts that total less than $150,000 are ignored – the de minimis rule. In this case, the value shift of $149,598 is less than $150,000 and ignored. Note, a subsequent value shift cannot occur because such value shift will mean the total of all value shifts, including the $149,598, will exceed the $150,000. This is assuming the other value shift will be at least $402. The end result is as follows:
Individual – 100 / 249 shares
Trust – 149 / 249 shares
The higher the value of the original shares, the lower the amount of shares that can be issued to remain within the less than $150,000 value shift exemption. The end result, being that the individual and family trust both hold shares may not be an ideal outcome. Scenario 2 The individual may transfer their 100 ordinary shares to a family trust. This will trigger CGT Event A1. Assuming the CGT 50% general discount applies, there still remains a capital gain. If the CGT small business concessions can apply to fully exempt the capital gain, this is best outcome. If the CGT small business concessions can apply to partially exempt the capital gain, for example active asset reduction but retirement exemption requires a super contribution, there still remains a capital gain. It may still be sound to make a retirement exemption super contribution, as a long-term financial plan, to fully exempt the capital gain. It may be possible for the family trust to obtain finance, for what is only 25% of the market value, to pay the individual that amount so that the individual can contribute that amount to super. Note, as set out in Tax Tip #1, the transfer of company shares does not qualify for the small business restructure rollover in subdivision 328-G because the shares are generally not active assets for the purposes of subdivision 328-G.
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