Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number: 1011622395838

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains tax - majority underlying interest

Question 1

Do pre-CGT assets owned by the taxpayer retain their pre-CGT status pursuant to Division 149 of Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The taxpayer was established some time ago. There is not an active market in the company's shares although shares have been sold to unrelated parties at values determined at that point in time. Due to the illiquidity of the shares in the company the majority of shares have been held by the original owners and passed down from generation to generation

It has become necessary to restructure the ownership of the taxpayer's business.

Legal advice has been obtained by the taxpayer to the effect that a new entity be created to conduct the operations of the business. The taxpayer will have no pecuniary interest in the new entity or the business.

The assets that are being disposed of by the taxpayer are goodwill, trading stock and plant & equipment.

A schedule showing details of all share transactions since 1985 has been provided.

This Ruling does not address when CGT assets were acquired.

Relevant legislative provisions

Section 149-30 of the Income Tax Assessment Act 1997

Section 149-15 of the Income Tax Assessment Act 1997

Reasons for decision

Division 149 of the Income Tax assessment Act includes the following:

Division 149 - When an asset stops being a pre-CGT asset  

Subdivision 149-B - When asset of non-public entity stops being a pre-CGT asset  

SECTION 149-30  Effects if asset no longer has same majority underlying ownership  

149-30(1) The asset stops being a *pre-CGT asset at the earliest time when *majority underlying interests in the asset were not had by *ultimate owners who had *majority underlying interests in the asset immediately before 20 September 1985.

149-30(1A) Also, Part 3-1 and this Part (except this Division) apply to the asset as if the entity had acquired it at that earliest time.

 

149-30(2) If the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before a particular time *majority underlying interests in the asset were had by *ultimate owners who had *majority underlying interests in the asset immediately before that day, subsections (1) and (1A) apply as if that were in fact the case.

The term majority underlying interest is defined by section 149-15 of ITAA 1997 as follows:

SECTION 149-15 Majority underlying interests in a CGT asset  

  

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.

149-15(3) An ultimate owner is:

an individual; or

a company whose *constitution prevents it from making any distribution, whether in money, property or otherwise, to its members; or

the Commonwealth, a State or a Territory; or

a municipal corporation; or

a local governing body; or

the government of a foreign country, or of part of a foreign country.

 

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:

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.

  

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:

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

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

The taxpayer has submitted that the majority underlying interest in its pre CGT assets are held by ultimate owners who had majority underlying interests in the assets immediately before 20 September 1985, (the advent of CGT), by the operation of subsection 149-30(3) and 149-30(4) of the ITAA 1997.

Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provides:

New owner standing in shoes of former owner

149-30(3) Subsection (4) affects how the *majority underlying interests in the asset are worked out if an *ultimate owner (the new owner) has acquired a percentage (the acquired percentage) of the *underlying interests in the asset because of an event described in column 2 of an item in the table. The former owner is the entity described in column 3 of that item.

Events leading to new owner standing in for former owner

Item

For this kind of event:

The former owner is:

1

*CGT event A1 or B1 if there is a roll-over under Subdivision 126-A (about marriage or relationship breakdowns) for the event

the entity that, immediately before the event happened, owned the *CGT asset to which the event relates

...........

2

the death of a person

that person

149-30(4) This section applies as if the new owner had (in addition to any other *underlying interests), at any time when the former owner had a percentage (the former owner's percentage) of the underlying interests in the asset, a percentage of the underlying interests in the asset equal to the acquired percentage, or the former owner's percentage at that time, whichever is the less.

An analysis of the information provided by the taxpayer reveals that:

Some of the shares issued by the taxpayer had not changed hands since 20 September 1985.

Some of the share transfers since 20 September 1985 are transfers from deceased estates where the deceased acquired the shares prior to 20 September 1985.

The relevant amount of share transfers from deceased estates where the deceased acquired the shares prior to 20 September 1985 are treated as having been acquired by the new owners at the same time as they were actually acquired by subsections 149-30(3) and 149-30(4) of the ITAA 1997. As the shares were all acquired prior to 20 September 1985, they are all treated as being held by ultimate owners who had majority underlying interests in the assets immediately before 20 September 1985.

The resultant shares held by ultimate owners who had majority underlying interests in the assets immediately before 20 September 1985 equate to a beneficial interest of a majority percentage of the shares held. As such the majority underlying interest in the taxpayer's pre CGT assets are held by ultimate owners who had majority underlying interests in the assets immediately before 20 September 1985

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).