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Dividend access shares and small business CGT concessions

The Full Federal Court, in its 30 November 2015 decision in FCT v Devuba, has shed some light on the vexed issue of dividend access shares (DAS) and the significant individual test in the small business CGT concessions.


A company will need to demonstrate it has a significant individual at the appropriate time or times when:

  • it wishes to obtain the 15 year exemption;
  • it wishes to obtain the retirement exemption; or
  • the shareholders sell their shares and wish to obtain the concessions.

An individual is a significant individual in a company if the individual has a small business participation percentage in the company of at least 20%. A shareholder in a company has a direct small business participation percentage equal to the percentage of voting power, dividend entitlements and capital distribution entitlements of the shares they hold. If the voting, dividend or capital distribution entitlements are different percentages then the shareholder’s percentage is the smallest of the three.

Where a company issues a DAS (the share has rights to dividends only) to a shareholder and ordinary shares to other shareholders then, arguably, the company does not have a significant individual. This is because no one individual has the right to receive at least 20% of any dividends paid by the company. It is possible for the company to pay dividends only to the holders of the ordinary shares or only to the holder of the DAS. Given that it is possible for both lots of shareholders to not receive any dividends when the company actually pays dividends then each individual shareholder has a small business participation percentage of 0%. This is the ATO view – refer TD 2006/7, in particular example 3.

FCT v Devuba

In this case there were three shareholders, two held ordinary shares and the third held a DAS. At first instance the AAT took the view that the significant individual test was satisfied despite the presence of the DAS. The AAT’s reasoning is not entirely clear. Whilst the Full Federal Court also found in favour of the taxpayer it did so for a slightly different reason. In 2008 a resolution was passed varying the rights attached to the DAS. They were varied so that they had no right to payment of a dividend until the directors first resolve the holders of a DAS have a right to payment of a dividend. The Full Federal Court held that as the directors had not passed such a resolution the company could not declare and pay a dividend on the DAS shares even if it wanted to. The DAS holder had no rights to dividends until the directors first resolved they had such rights. Therefore, if the company declared a dividend it could only be paid to the holders of the ordinary shares. Thus the ordinary shareholders were the only shareholders that had rights to dividends.

What this means in practice

Great care needs to be undertaken when issuing a DAS so as not to cause a problem with being entitled to the small business CGT concessions. It seems without the 2008 variation of rights to the DAS the Full Federal Court would have found in favour of the Commissioner. So the issue of a DAS is still likely to cause problems with taxpayers satisfying the significant individual test unless the DAS has a restriction of the type that was imposed by the 2008 variation in Devuba. There are other possible solutions, such as to make the DAS redeemable as redeemable shares are ignored when determining an individual’s direct small business participation percentage.


Rob Warnock
Patrick Cussen

By |December 14th, 2015|News, Uncategorised|0 Comments

Be careful with trust deed amendments

Be careful how you tread!

We are often asked to ‘update’ trust deeds. This is generally in relation to amending defined terms, amendments in relation to Bamford’s case, changes to the streaming of capital gains and dividends or amending appointor provisions to provide for succession.

Whilst ‘resettlement’ issues are always a concern, care must also be taken to ensure the deed actually allows the desired amendment to be undertaken. The wording of the variation clause is critical. If the trustee only has a power to amend the trusts created under the deed the power to amend may not be sufficient meaning the intended amendments are invalid.

If an amendment is invalid then any transactions made in reliance on the amendment may also be invalid – such as income distributions, which in turn could leave the trustee being taxed under section 99A.

A recent case example

In the recent Supreme Court of Western Australia case of Mercanti v Mercanti the court held that the deed of variation of one of the trusts to amend the definition of appointor was invalid. This was because the amending power in the deed was not broad enough – it gave the trustee power to “vary all or any of the trusts hereinbefore provided”. This type of amending power is found in many trust deeds.

The lesson

Always read the trust deed carefully and do not assume that a broad amending power exists.  Other provisions in a deed can affect the interpretation of an emending power, so we recommend you always seek advice from lawyers experienced in this field.

Clients and advisers should contact us if they are considering amending a trust deed or are concerned with the validity of an amendment.


Rob Warnock
Patrick Cussen

© Bernie O’Sullivan Lawyers

By |October 10th, 2015|News, Uncategorised|0 Comments