Tax Rambling

If you want more analysis of the Treasury’s proposed changes to Division 7A in its October 2018 paper, and lots of complaints about how they have handled the process and the outcomes, I have written a paper on it that can be downloaded by clicking on the link below. Enjoy.

Division 7A to change

The Government has promised a series of changes to Division 7A and we have finally got an idea of what these changes will be. 

Remember this is just a discussion paper, but I am confident these all will occur.

Change 1 – Simplified Loans

The biggest change is that the current 7 year and 25 year loan models will be replaced by a single loan model which has the following features:

1. A 10 year loan begins at the end of the income year in which the advance is made.
2. The taxpayer is still given until the lodgment day of the private company’s income tax return to repay the loan or put it on complying loan terms.
3. The annual benchmark interest rate will be the Small business; Variable; Other; Overdraft Indicator Lending rate most recently published by the Reserve Bank of Australia prior to the start of each income year.
4. There will be no requirement for a formal written loan agreement, however written or electronic evidence showing that the loan was entered into must exist by the lodgment day of the private company’s income tax return.
5. The minimum yearly repayment amount consists of both principal and interest, BUT the principal component is a series of equal annual payments over the term of the loan. The interest component is the interest calculated on the opening balance of the loan each year using the benchmark interest rate.
6. Interest is calculated for the full income year, regardless of when the repayment is made during the year (except Year 1). If the loan is paid out early, that is before Year 10, interest will not be charged for the remaining years of the loan.
7. Repayments of the loan made after the end of the income year but before the lodgment day for the first income year are counted as a reduction of the amount owing even if they are made prior to the loan agreement being finalised. Interest for Year 1 is calculated for the full income year on the balance of the loan outstanding at lodgment day.

Here is the Government’s example of how this will work…

Example: Calculation of the deemed dividend

Bert is the sole director and shareholder of Sesame Pty Ltd.

On 1 August 2019, Bert withdraws $100,000 from Sesame Pty Ltd to pay for the renovation of his house. Bert does not have the funds to pay back Sesame Pty Ltd by the lodgment day of Sesame Pty Ltd’s income tax return, 15 May 2021.  To avoid the $100,000 being treated as if it were a dividend paid from Sesame Pty Ltd, Bert decides to put in place a complying Division 7A loan agreement.

The repayments that Bert would be required to make according to the new loan model would be as follows:

Year	Interest Rate*	Opening Balance $	Interest Amount $	Principal Amount $	Minimum Repayment $	Closing Balance $
2020-21	8.50%	100,000	8,500	10,000	18,500	90,000
2021-22	7.00%	90,000	6,300	10,000	16,300	80,000
2022-23	6.50%	80,000	5,200	10,000	15,200	70,000
2023-24	8.00%	70,000	5,600	10,000	15,600	60,000
2024-25	9.00%	60,000	5,400	10,000	15,400	50,000
2025-26	8.25%	50,000	4,125	10,000	14,125	40,000
2026-27	7.90%	40,000	3,160	10,000	13,160	30,000
2027-28	8.00%	30,000	2,400	10,000	12,400	20,000
2028-29	9.20%	20,000	1,840	10,000	11,840	10,000
2029-30	7.50%	10,000	750	10,000	10,750	0

*Interest rates shown are for illustrative purposes only

The interest paid by Bert each year will be taxed as income to Sesame Pty Ltd at its corporate tax rate.

• If the repayment actually made in the income year is less than the required minimum yearly repayment, a deemed dividend will arise for the amount of the shortfall between the minimum yearly repayment and the actual repayment made for that income year.

For example, the minimum yearly repayment in the above loan model example for the 2022-23 income year would be $15,200. If the actual repayment made in the 2022-23 income year was $12,200, the deemed dividend would be $3,000. Bert will include this $3,000 as income for the year, and pay tax at his marginal tax rate.

Change 2 – Self-correct without telling the Commissioner

Under the proposed changes, qualifying taxpayers will also be permitted to self-assess their eligibility for relief from the consequences of Division 7A. To qualify for self-correction, the taxpayer will need to meet eligibility criteria in relation to the benefit that gave rise to the breach. The eligibility criteria will require that:

• The breach of Division 7A was an inadvertent breach;
• Appropriate steps have been taken as soon as practicable; and
• The taxpayer has taken, or is taking, reasonable steps to identify and address any other breaches of Division 7A.

Under this approach, in order to self-correct an eligible taxpayer must:

• Convert the benefit into a complying loan agreement, on the same terms that would have applied had the loan agreement been entered into when it should have been; and
• Make catch-up payments of the principal and interest that would have been payable as prior minimum yearly repayments had the taxpayer complied with Division 7A when it should have. The interest component of the catch-up payment will be compounded to reflect prior year non repayments. This compounded interest should be declared as assessable income in the private company’s income tax return for the income year in which the catch-up payment is made.

 So now when you get the new client with heaps of Div7A issues you can clearly tell them how to fix it up. 

Change 3 – Distributable surplus

The third major change is to the concept of distributable surplus – actually it is the total removal of the concept of distributable surplus.

This will align the treatment of dividends with section 254T of the Corporations Act 2001 which allows dividends to be paid out of both profits and capital.

And let’s be honest, if a certain amount is ‘distributed’ to the shareholder, then tax should be paid on the entire amount, and it should not be arbitrarily limited.

Change 4 – UPE argument over 

After eight years of arguing with the Commissioner on whether UPE’s fall within Div 7A the argument is over as the law will be changed to say they are.

Under the proposed chnages, where a UPE remains unpaid at the lodgment day of the private company’s income tax return, the UPE will be a deemed dividend from the company to the trust or the UPE can be put on ‘complying loan terms’ under which principal and interest payments are required to be made.

All UPEs arising on, or after 16 December 2009 and on, or before, 30 June 2019, that have not already been put on complying loan terms or deemed to be a dividend, will need to be put on complying terms by 30 June 2020. The first repayment for such loans would be due in the 2019-20 income year. Any amounts outstanding that have not been put on complying loan terms by the end of the 2019-20 income year will result in a deemed dividend for the outstanding amount of the UPE.

All UPEs that arise on, or after, 1 July 2019 will need to be either paid to the private company or put on complying loan terms under the new 10 year loan model prior to the private company’s lodgment day, otherwise they will be a deemed a dividend.

Effectively, from 1 July 2019 there will be no argument… a UPE is the same as a loan.

Summary

There are lots of other proposed changes that will not be as relevant as these four changes and we can consider these later. But from these four main changes…

From 1 July 2019:

1. If you find a Div 7A problem, you just fix it by paying what you missed;
2. I don’t need written loan agreements;
3. You don’t need to do distributable surplus calculations;
4. UPEs to corporate beneficiaries are just treated like loans from the company to the trust;
5. I pay the same principal off each year, 1/10^thof the initial loan;
6. The interest is just the Small business; Variable; Other; Overdraft Indicator Lending rate most recently published by the Reserve Bank of Australia prior to the start of each income year; and
7. I pay off the loan over 10 years in every case.

Not as massive a change as we hoped, but a good start.

On Budget night in May the Treasurer indicated there would be changes from 1 July 2019 that would deny some deductions for expenses related to holding vacant land. In Exposure Draft – Treasury Laws Amendment (Measures For A Later Sitting) Bill 2018 we finally have an idea of what they are going to stop us claiming deductions on.

While that exposure draft proposes to deny deductions for expense incurred to the extent they relate to holding vacant land, they do not apply to expenses relating to holding vacant land to the extent they are incurred in a business the that taxpayer, or an affiliate, spouse or child of the taxpayer carries on. They also do not apply to companies, superfund that are no SMSFs and entities used by institutional investors in residential premises.

Expenses that are not deductible are included in the cost base of the asset for CGT purposes.

But what is vacant land?

“no building or other structure on the land that is substantial and permanent in nature and in use or ready for use”.

Example

Chelsy owns a block of land. She intends to eventually build a rental property on the land. However, while the block of land is fenced and has a large retaining wall, it currently does not contain any substantial or permanent building or other structure. As the property does not have a substantial permanent building or structure on it, it is vacant land and Chelsy cannot deduct any holding costs she may incur in relation to the land.

If there are vacant parts of land you need to reasonably attribute expenses to the vacant, and other, parts of the land.

Example

Howard owns a country house with a pool on a hectare of land in Queensland. He uses one third of the land for carrying on his firewood sales business. His house and firewood business are separated by a fence and the remainder of the land is unoccupied and unused. Howard intends to build a rental property on the unoccupied land.

Howard is eligible to claim losses and outgoings relating to holding the part of the land that he uses for carrying out his firewood business, to the extent that the loss or outgoing is necessarily incurred for the purpose of gaining or producing the assessable income from the business. He cannot deduct any expenses associated with the cost of holding the land on which his country house is built because that part of the land is used for private use.

The remainder of his land is unoccupied and is not used in carrying on his business and therefore Howard is not entitled to claim any deductions relating to the costs of holding this part of the land even though he intended to derive income from it in the future.

Deductions are not denied if you are carrying on a business, like property development or primary production.

Example

Ainslie carries on business as a property developer and owns a significant property portfolio of vacant land in Melbourne. She incurs outgoings relating to holding the vacant land including interest payments and council rates. As she incurs the expenditure to hold the land in carrying on her business for the purpose of producing assessable income it is deductible.

Example

Gina owns vacant land in New South Wales which she rents to her spouse Robin for use in a farming business he carries on. Robin, as Gina’s spouse, forms part of the class of related parties (spouses, children under 18 years old, affiliates and connected entities) that allow Gina to deduct her costs of holding the land. This is because Robin is carrying on a business on it to produce assessable income.

Finally, there is a special rule applies to land that contains residential premises within the meaning of the GST Act. Such structures are disregarded and the land is treated as remaining vacant for the purposes of these amendments until the residential premises are able to be occupied under the law and are leased, hired or licensed or available for lease, hire or licence.

Example

Anna purchased a block of vacant land and built new residential premises on it. Occupancy permits are issued for the residential premises once the building is considered suitable for occupation. The building is available for lease and advertised in various property websites which give it broad exposure to potential tenants. Anna can deduct the cost of holding this block of land to the extent expenses relate to the period when the property is legally available for occupation and is leased etc or otherwise available for lease etc.

The summary, no probs for property developers… but what if you are not quiet yet a property developer…

But not for a few years…

As we have previously discussed here, there are two company tax rates. They are 30%, or if the company has an aggregated turnover under $50m ($25m last year) and has less than 80% of its income from “base rate passive income”, the rate is 27.5%.

In the Treasury Laws Amendment (Lower Taxes For Small and Medium Businesses) Bill 2018 ONLY the rate of 27.5% changes. The same companies are eligible for the lower rate, but that rate will be:

– 26% from 1 July 2020; and

– 25% from 1 July 2021.

So the difference between to top marginal rate and the company rate for small and medium businesses goes to 22%. That is not going to encourage warehousing income in companies??? More PSI cases and more Div 7A ideas…

This Bill also increases the Small Business Income Tax Offset to 13% from 1 July 2020 and 16% from 1 July 2021… But as this offset is capped at $1,000 from 1 July 2021, if you have more than $6,250 of income from your small business, the 16% rate gets you to $1,000.

We now have Exposure Draft legislation that proposes to prevent the small business CGT concessions from being available for assignments of the income of a partner and other rights or interests in the income or capital of a partnership that are not a membership interest in the partnership.

Since the 1980 High Court decision in Everett, partners can make an assignment of some of their interest in the partnership. Such an assignment does not make the assignee a partner but means that the partner holds the partnership interest on trust for the assignee and the income is taxed to the assignee. These assignments result in a CGT event and  the small business CGT concessions can be used to reduce  any resulting capital gain.

Under these new rules, the small business CGT concessions remain available for genuine disposals and transactions that affect the substance of the operation of the partnership.

However, they are not available for assignments and other rights or interests that merely result in the transfer of income or capital that a partner receives from the partnership to other entities without making the other entity a partner.

Example

Laura, a partner in a partnership, makes an equitable assignment of half her partnership interest to Dominic, her spouse. This entitles Dominic to half of any amounts Laura receives as a partner, but does not make Dominic a partner.

The assignment results in Laura having a CGT event. The CGT event involves both the variation of Laura’s partnership interest and the creation of a right in the hands of Dominic.

Both interests entitle the entity holding the interest – Laura for the partnership interest, and Dominic for the right to income – to an amount of the income and capital of the partnership. As a result, both interests must satisfy the additional basic condition for the small business CGT concessions to be available for the CGT event.

The partnership interest held by Laura is a membership interest of Laura’s in the partnership and satisfies the condition. The equitable interest held by Dominic is not a membership interest of Dominic’s and cannot satisfy the condition.

As Dominic’s interest does not satisfy the new additional basic condition, the small business CGT concessions are not available to Laura in relation to the CGT event.

Last year, 6.7 million taxpayers claimed a record $7.9 billion in deductions for ‘other work-related expenses’ which includes expenses related to working from home. This worries the Commissioner…

Technology-driven changes to the employment market are seeing record numbers of Australians claiming deductions for expenses incurred while working from home. But a high level of mistakes, errors and questionable claims has prompted the Australian Taxation Office (ATO) to increase attention, scrutiny and education for home office expenses this tax time.

What are these mistakes, errors and questionable claims due to…

“If working from home means sitting in front of the TV or at the kitchen bench doing some emails, it’s unlikely that you are incurring any additional expenses. However, if you have a separate work area, then you can claim the work-related portion of running expenses for that space,”

And then the Commissioner gets a lot more specific in three areas… The first is over-claiming mobile phone and internet expenses

An architect claimed 80% of the cost of his private mobile phone and home internet as a work-related expense.

When asked, the taxpayer provided his non-itemised phone and internet bills for the year as evidence for his claim. However, he had not maintained a diary or other record demonstrating how he calculated that 80% of his costs related to his work. His employer was also unable to verify the extent to which he was required to use his private mobile and internet connection for work.

Although the taxpayer had not maintained or provided appropriate records, the ATO did accept that he was required to incur these expenses and allowed a claim of $50 – the maximum phone/internet claim that can be allowed without supporting evidence.

The second is incorrectly apportioning expenses.

A teacher who was promoted to school principal in the income year claimed home office expenses for electricity and phone of $2,400.

When the ATO contacted the tax agent, the agent provided a letter from the employer to confirm that the taxpayer was required to work from home out of school hours. However, neither the taxpayer nor their agent could demonstrate how they calculated the claim.

The taxpayer submitted a voluntary disclosure, explaining that they had made an incorrect claim and lacked records to substantiate it, and should have instead used the fixed rate of 45 cents per hour. Based on the hours the taxpayer had worked at home over the school year, the claim was reduced by 70%.

A penalty was applied for not taking reasonable care when preparing the return. However, the penalty was reduced because the taxpayer provided the voluntary disclosure before an audit commenced.

And the third is incorrectly claiming occupancy expenses.

An advertising manager claimed a deduction for her rent and electricity costs. When asked why she made these claims, the taxpayer explained that she was required to work at home outside regular hours because a lot of business was generated from overseas clients, and provided the calculations for her claims.

However, the area used by the taxpayer did not have the character of a ‘place of business,’ (eg a hairdresser’s home salon, caterer’s home kitchen or a photographer’s home studio). This meant that while her claim for electricity costs (running expenses) was allowed, her claim for rent (occupancy expense) was disallowed. A penalty was also applied for failing to take reasonable care.

We finally have some long-feared changes to the small business CGT concessions. These are in the Treasury Laws Amendment (Tax Integrity and Other Measures) Bill 2018 and have now passed the Parliament.

These changes propose to add additional basic conditions for these concessions to apply, but only where the CGT asset is share in a company or interest in a trust. If it is not a share or a unit there are no changes.

Remember that these amendments apply to CGT events that occur on or after 8 February 2018. The Government states that this “retrospective application is consistent with the Budget announcement by the Government on 9 May 2017 to ensure the small business CGT concessions are only available in relation to assets used in a small business and ownership interests in small businesses.”

The big change – looking through to the object entity

If I am selling shares or units, one of the questions I need to ask is if I am a small business entity or if I pass the maximum net assets test. But under the new rule I also have to ask if the object entity, being the entity that I own shares or units in, is a small business entity or passes the maximum net assets test.

Karen carries on a small consulting business as a sole trader. She is a CGT small business entity (according to the general rules) for the 2019-20 income year.

Karen also owns 30 per cent of the shares in Big Pty Ltd, a large private company with annual turnover in excess of $20 million in both the 2018-19 and 2019-20 income years. The net value of Big Pty Ltd’s CGT assets exceeds $100 million throughout this period.

On 1 October 2019, Karen sells her shares in Big Pty Ltd. She would not be eligible to access the Division 152 CGT concessions for any resulting capital gain.

Even if Karen satisfies the other basic conditions for relief, she cannot satisfy the new condition. Big Pty Ltd is not a CGT small business entity in the 2019-20 income year. It also does not satisfy the maximum net asset value test in relation to the capital gain, as its net assets exceed $6 million immediately prior to the CGT event happening (being in excess of $100 million for the entire income year).

If the object entity does not pass these tests, the small business CGT concessions do not apply to the sale of the shares or units in the object entity.

George carries on a small gardening business. George is a CGT small business entity for the 2019-20 income year.

George holds all of the units in G Trust, a trust that holds a number of investments in other entities but which does not carry on a business. The total value of the investments held by G Trust also means that it does not satisfy the maximum net asset value test.

On 17 February 2020, George sells the units it holds in G Trust. George is not eligible to access the Division 152 CGT concessions for any resulting capital gain.

Even if George satisfied the basic conditions for relief, he cannot satisfy the new condition as G Trust is not a CGT small business entity (as it does not carry on a business) and does not satisfy the maximum net asset value test.

When working out if the object entity is a CGT small business entity or satisfies the maximum net asset value test, the turnover or assets of entities that may control the object entity are disregarded. This ensures that the outcomes for taxpayers do not depend upon the income or assets of third parties.

Further, for these purposes (and only these purposes), an entity is treated as controlling another entity if it has an interest of 20 per cent or more, rather than 40 per cent or more. This means that more entities are considered to be ‘connected with’ one another for the purpose of this test and need to count the assets or turnover of the other entity towards their aggregate turnover or the total net value of their CGT assets.

Tien owns 20 per cent of the shares in Investment Co, a company that carries on an investment business. Investment Co is a CGT small business entity for the 2020-21 income year.

Investment Co holds 20 per cent of Van Co, a transport company. Van Co’s turnover and assets mean that it is not a CGT small business entity in the 2020-21 income year and does not satisfy the maximum net asset value test at any point during the income year.

On 15 May 2021, Tien sells his shares in Investment Co. He is not eligible to access the Division 152 CGT concessions for any resulting capital gain.

Even if Tien satisfies the other conditions, he cannot satisfy the new condition requiring the object entity be a CGT small business entity or satisfy the maximum net asset value test due to the modifications that apply when determining this matter for the purposes of this condition.

For the purposes of this condition, Investment Co is considered to be connected with Van Co, as Investment Co holds 20 per cent of Van Co’s shares. As a result, for this purpose, Investment Co’s turnover and assets include the turnover and assets of Van Co. As Van Co is not a CGT small business entity and does not satisfy the maximum net asset value test, Investment Co is also treated as not satisfying these requirements (despite its status under the general rules in the tax law).

A welcome change – retrospective small BUSINESS entities

Another change proposed in this Bill is the taxpayer must have carried on business just prior to the CGT event happening. This ensures that entities do not benefit from this concession where the relevant business activities are too remote to justify the entity receiving a concession for business activities.

However, this requirement does not apply to taxpayers that satisfy the maximum net asset value test in relation to the CGT event.

The technical change – modified active asset test for the sale of shares and units

There is an additional new condition that requires that, to pass the active asset test, for the lesser of seven and a half years or at least half the period a taxpayer has held the share or interest, at least 80 per cent of the sum of the:

• total market value of the assets of the object entity (disregarding any shares in companies or interests in trusts); and
• total market value of the assets of any entity (a later entity) in which the object entity had a small business participation percentage of greater than zero, multiplied by that percentage

must have related to assets that are:

• active assets; or
• cash or financial instruments that are inherently connected with a business carried on by the object entity or a later entity.

Further, if these assets are held by a later entity, being an entity that is owned by the object entity, the assets will only be active at a time if the later entity is an entity:

• that is, at the relevant time, either:
• • a CGT small business entity; or
• • satisfies that maximum net asset value test in relation to the capital gain; and
• in which the taxpayer has a small business participation percentage of at least 20 per cent or is a CGT concession stakeholder at the relevant time.

In determining if an entity is a CGT small business entity or satisfies the maximum net asset value test at a time, do not include the turnover or value of assets of entities that can control the object entity and control is an interest of 20% or more

What does this all mean??? In effect, when selling a share or a unit, the active asset test in is modified to adopt a look-through approach. Rather than treating shares or interests as active assets based on the activities of the underlying company, the modified test looks through such membership interests to include the proportionate amount of the value of the assets of other entities to which the interests relate.

And remember, it only includes a percentage of the later entity assets based on ownership. And remember, any asset of a later entity will not be an active asset if the later entity is not either a small business entity or passes the maximum net assets test AND the taxpayer has a 20% or greater ownership of.

But the best way to understand this is to look at an example or three…

Jesse carries on a small lapidary business as a sole trader. He is a CGT small business entity (according to the general rules) for the 2019-20 income year.

Jesse owns 50 per cent of the shares in A Co. A Co carries on a business providing cleaning services and is a CGT small business entity in the 2019-20 income year.

A Co also owns 10 per cent of B1 Pty Ltd and 15 per cent of B2 Pty Ltd. Both of these companies are also CGT small business entities in the 2019-20 income year. These companies are not affiliates of A Co.

There has been no significant change in the activities or holdings of A Co, B1 Pty Ltd or B2 Pty Ltd over the period Jesse has owned his shares.

On 9 November 2019, Jesse sells his interest in A Co.

In working out if this interest satisfies the modified active asset test, when working out the total value of the assets of A Co, Jesse must disregard the value of the shares A Co holds in B1 Pty Ltd and B2 Pty Ltd and include 10 per cent of the value of the assets of B1 Pty Ltd and 15 per cent of the value of the assets of B2 Pty Ltd.

Further, for this purpose none of the assets of B1 Pty Ltd and B2 Pty Ltd are active assets for A Co. Jesse’s small business participation percentage in B1 Pty Ltd is 5 per cent (i.e. his 50 per cent stake in A Co multiplied by A Co’s 10 per cent stake in B1 Pty Ltd). Similarly, his small business participation percentage in B2 Pty Ltd is 7.5 per cent (i.e. his 50 per cent stake in A Co multiplied by A Co’s 15 per cent stake in B2 Pty Ltd).

Still think this is hard… I do!

Charlotte owns 35 per cent of the shares in Colour Co. Colour Co carries on a business of wholesaling paint and related products and is a CGT small business entity (according to the general rules) in the 2019-20 income year.

Colour Co owns 20 per cent of the shares in three pigment suppliers Red Co, Green Co and Blue Co. Red Co and Blue Co are both CGT small business entities for the 2019-20 income year (and have been since Colour Co acquired its interest) according to the general rules. Green Co is not and has never been a CGT small business entity as it exceeds the turnover threshold.

On 3 March 2020, Charlotte sells her shares in Colour Co.

In working out if this interest satisfies the modified active asset test, when working out the total value of the assets of Colour Co, Charlotte must disregard the value of the shares Colour Co holds in Red Co, Blue Co and Green Co and include 20 per cent of the value of the assets of these companies.

Further, for the purposes of the modified active asset test, assets of later entities are only active if the entity is a CGT small business entity or satisfies the maximum net asset value test.

Green Co is not a CGT small business entity as its turnover is too high.

Additionally, Charlotte must treat Red Co, Blue Co and Green Co as being connected with Colour Co and with each other for the purposes of the test, because Colour Co holds 20 per cent of the shares of each entity.

Because they are treated as being connected with Green Co, Red Co and Blue Co are also treated as not being CGT small business entities for these purposes.

As a result, Charlotte is not able to treat the assets of Red Co, Blue Co or Green Co as active assets for the purposes of this test unless the entities satisfy the maximum net asset value test.

Still confused… so am I…

Arnold carries on a small marketing business as a sole trader. He is a CGT small business entity (according to the general rules) for the 2019-20 income year.

Arnold also owns 20 per cent of Channel Investments Trust, a trust that invests in a wide range of widely held trusts and companies.

Channel Investments Trust has assets with a total net market value of $2 million, of which $1.95 million consists of shares in companies and units in trusts. Channel Investments Trust has never had a small business participation percentage exceeding 10 per cent in any other entity.

On 20 April 2020, Arnold sells his interest in Channel Investments Trust. Arnold is not eligible to access the CGT concessions under Division 152 for any resulting capital gain.
While Arnold may satisfy the basic conditions for relief for the capital gain, he does not satisfy the new conditions.

The investment in Channel Investments Trust does not satisfy the modified active asset test as 97.5 per cent of its assets are shares and interests in trusts that are considered passive assets as its small business participation percentage in the relevant entities is less than 20 per cent.