Genuine investors in private trusts and companies 043-04110060

Mum decides to invest $100,000 in her daughter's company. Prior to her investment the company is valued at $200,000. The only shareholders are her daughter and son-in-law. Each holds 1 A class share. For her $100,000 investment, Mum receives 1 C class share.

In this example a genuine capital injection has occurred. Mum's investment of $100,000 increases the value of the company by one-third. In return she receives a one-third share holding in the company and entitlement to one-third of any dividends.

Assessment: Mum

Mum is regarded as a genuine investor and will have the historical value of the injection of capital assessed against her subject to the following conditions:

• The amount will be limited to the percentage share holding purchased, but must be less than 50% of the present capital value of the company, (otherwise Mum would be considered to be the controller)
• If the value of the company falls, the amount of the historical value attributed to Mum may be subjected to reduction. This will be based on the information provided by the customer, and will take into account the current and past circumstances of the company

Dividends will be treated as income for 12 months from the date of distribution.

Assessment: Company

The genuine injection of capital is not regarded as an asset of the attributable stakeholder. The amount of the injection will be included in the entity's assets. However, for the purpose of attribution, the current value of the entity's assets will also be reduced by the historical value of the injection.

Reasonable dividend payments, based on shareholdings, can also be made to Mum and will not be treated as income or as a gift of the attributable stakeholder.

Explanation

Limiting Mum's interest to the historical value reflects the actual contribution, while recognising the reality that a non attributable stakeholder relies entirely on the goodwill of the attributable stakeholder as:

• the investor may never regain access to her investment, let alone any appreciation
• until such time as a capital distribution is made, the attributable stakeholder has the enjoyment of the funds injected, including any appreciation

Mum and Dad decide to invest $60,000 in their son's company. Prior to their investment the company is valued at $60,000. The only shareholders are their son and daughter-in-law. Each hold 5 A class shares. For their $60,000 investment, Mum and Dad receive 1 C class (non voting) share each.

In this example a genuine capital injection and deprivation has occurred. Mum's and Dad's investment of $60,000 increases the value of the company by 100% to $120,000, that is, their capital contribution equates to 50% of the value of the company. In return, they receive only a one-sixth holding in the company and entitlement to one-sixth of any dividends.

Assessment: Dad and Mum

Following the injection of capital the value of the company is $120,000. 12 shares have been issued therefore the value of each share, in direct relation to the value of the company is $10,000. For the $60,000 investment Mum and Dad have received a total of 2 shares, total value $20,000. Mum and Dad are considered genuine investors.

• The actual amount of their genuine investment is $20,000 (that is, the total value of their 2 shares)
• The historical value of their genuine investment ($10,000 each) will be assessed as their asset. This is subject to the conditions outlined in Example 1
• The amount of any dividend will be regarded as income for 12 months from the date of receipt
• As they did not receive adequate consideration for their $60,000 investment, the remaining $40,000 ($60,000 less the $20,000 actual value received) is regarded as a gift and deprivation would be assessed accordingly

Assessment: Company

The genuine injection of capital ($20,000) is not regarded as an asset of the attributable stakeholder(s).

The total amount of the injection ($60,000) will be included in the entity's assets.

The entity's assets will be reduced by the historical value of the genuine injection ($20,000).

Reasonable dividend payments, based on shareholdings, can also be made to Dad and Mum and will not be treated as income or as a gift of the attributable stakeholder(s).

A family company is established and issues Mum and Dad with 1 A class (voting share) each and 49 C class (non voting shares) to each of their two children.

Assessment

In this example no genuine capital injection has occurred. As the controllers, Mum and Dad, are attributed with 100% of the income and assets of the company. Any dividends made to the children will be assessed as a gift from Mum and Dad and income in the hands of the recipient for 12 months from date of receipt.