ATO Interpretative Decision

ATO ID 2006/144

Income tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Can an individual have a beneficial interest for the purposes of subsections 149-15(4) and 149-15(5) of the Income Tax Assessment Act 1997 (ITAA 1997) in the CGT assets of a superannuation fund of which the individual is a member?

Decision

Yes. Those subsections hypothesise distributions of capital or dividends that override the common law position that a member of a superannuation fund has no interest in the fund's assets, until the happening of a defined event, such as the member's retirement.

Facts

The individual at all relevant times has been the only member of Superannuation Fund, a discretionary trust.

Superannuation Fund owns an asset acquired before 20 September 1985 - a pre-CGT asset.

Reasons for Decision

Under subsection 149-30(1) of the ITAA 1997 a CGT asset of an entity stops being a pre-CGT asset at the earliest time when the 'majority underlying interests' in the asset were not held by ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985.

Superannuation Fund is an 'entity' by virtue of paragraph 960-100(1)(g) of the ITAA 1997.

The individual, as a member of Superannuation Fund, is an 'ultimate owner' in accordance with paragraph 149-15(3)(a) of the ITAA 1997.

Subsection 149-15(1) of the ITAA 1997 specifies that the 'majority underlying interests' in a CGT asset consist of:

(a)

more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

(b)

more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

At common law, the individual has no interest in the assets of Superannuation Fund until a defined event under the fund's deed, such as retirement, occurs. See for example the decision of O'Loughlin J in Re Coram; Ex parte Official Trustee in Bankruptcy v. Inglis and Others (1992) 36 FCR 250; (1992) 109 ALR 353 at 356-357.

However, the operation of subsections 149-15(4) and 149-15(5) of the ITAA 1997 which determine whether an ultimate owner has an indirect interest in a CGT asset or the ordinary income that may be derived from the asset, override that common law position.

Both subsections test for the existence of indirect beneficial interests by respectively hypothesising that an individual could receive for his or her own benefit any capital or dividends distributed by a superannuation fund of which he or she is a member.

Subsection 149-15(4) of the ITAA 1997 provides that:

149-15(4) 'An *ultimate owner indirectly has a beneficial interest in a *CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if:

(a)

the other entity were to distribute any of its capital; and

(b)

the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner.

*denotes a term defined in section 995-1 of the ITAA 1997.

Similarly Subsection 149-15(5) of the ITAA 1997 provides that:

149-15(5) An *ultimate owner indirectly has a beneficial interest in *ordinary income that may be *derived from a *CGT asset of another entity (that is not an *ultimate owner) if he, she or it would receive for his, her or its own benefit any of a *dividend or income if:

(a)

the other entity were to pay that dividend, or otherwise distribute that income; and

(b)

the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner.

As the only member of Superannuation Fund, it is reasonable to conclude that the individual would receive for 'his or her own benefit' any capital or dividends that the entity Superannuation Fund would hypothetically pay.

Accordingly the individual at all relevant times has had 100% of the beneficial interests in Superannuation Fund's pre-CGT asset and any ordinary income that may be derived from the asset.

Those beneficial interests constitute 'underlying interests' in the pre-CGT asset for the purposes of subsection 149-15(2) of the ITAA 1997.

Subsection 149-15(2) of the ITAA 1997 provides as follows:

149-15(2) An underlying interest in a CGT asset is a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be *derived from the asset.'

As the sole owner of all underlying interests in Superannuation Fund's pre-CGT asset, there has been no change in the majority underlying interests in the pre-CGT asset for the purposes of subsection 149-15(1) of the ITAA 1997.

Year of income:  Year ended 30 June 2007 Year ended 30 June 2008

Legislative References:
Income Tax Assessment Act 1936
   section 160ZZS

Case References:
Re Coram; Ex parte Official Trustee in Bankruptcy v. Inglis and Others
   (1992)36 FCR 250
   (1992)109 ALR 353

Keywords
Capital gains tax
CGT assets
Majority underlying interests
Pre-CGT assets

Business Line:  Losses and Capital Gains Tax Centre of Expertise

Date of publication:  2 June 2006

ISSN: 1445-2782