220.127.116.11 Capital Injections in Return for Equity in a Private Trust or Private Company
Date of effect
This topic has effect to controlled private unit trusts and controlled private companies from 1 January 2002.
This topic contains information on the following:
- determining a genuine investor,
- determining a genuine capital injection,
- the treatment of genuine capital injections for the investor,
- the treatment of genuine capital injections for the attributable stakeholder.
Determining a genuine investor
A person will be considered to be a genuine investor where:
- they are aged over 18 years,
- they are not an attributable stakeholder of the private company or private fixed trust, and
- they provide capital to a private company in exchange for shares, or they provide capital to a private fixed trust in exchange for units in the trust.
Note: A person who purchases shares in a company equal to 50% or greater of the present capital value of the company is an attributable stakeholder.
Note: It is not possible to obtain equity in a discretionary trust.
Determining a genuine capital injection
A genuine injection of capital will have occurred when the person:
- receives shares in the company or units in the trust that is reasonably commensurate with the amount of the capital injection, and
- has a right to dividends or distributions from the trust, and that right is reasonably commensurate with the amount of the capital injection, and
- the person has a right to a share of the capital on the winding up of the company or trust, and that right is reasonably commensurate with the amount of the capital injection.
Treatment of genuine capital injections for the investor
A genuine investor will have the historical value of the capital injection assessed against them. Limiting the amount to the historical value recognises the investor's actual contribution, while recognising that until a capital distribution is made, the attributable stakeholder has the enjoyment of the funds injected, including any appreciation.
If the value of the company falls, the amount of the historical value attributed to the person may be subject to reduction, based on the information provided by the income support recipient, and taking into account the current and past circumstances of the company.
Treatment of genuine capital injections for the attributable stakeholder
A genuine capital injection is not regarded as the income of the attributable stakeholder/s.
The amount of the injection will be included in the entity's assets and the entity's assets will also be reduced by the historical value of the injection.
Reasonable dividend payments can also be made to the genuine investor without being treated as income or as a gift of the attributable stakeholder/s. Such dividends will be treated as income of the genuine investor for 12 months from the date of distribution.
Example: Michael and Sarah are a young couple who own a small haulage company. They are concerned about the new rules as they have 3 small children, and as profits from the business are low, they rely on family payment and PP.
However, they have been planning for some time to buy out a rival haulage business in order to make the company big enough to be profitable. Sarah's father is very well off and he is prepared to inject $200,000 into the company to do this. Sarah's father is to receive shares and dividends in return for his investment and is happy for Sarah and Michael to continue in control of the company.
Sarah and Michael are doubly relieved to learn that, provided Sarah's father's proposed investment is genuine, the $200,000 investment will not affect their entitlements. They also learn that they can make reasonable dividend payments to Sarah's father without affecting their social security payments. This is because distributions from a company to genuine investors are not treated as the income of the attributable stakeholders OR as a gift by the controller.
Act reference: SSAct section 1207X Attributable stakeholder, asset attribution percentage and income attribution percentage, section 1208E Attribution of assets, section 1207Y Attribution of income
Policy reference: SS Guide 18.104.22.168 Transfers of the Capital of a Private Trust or Private Company