Edited version of private ruling

Authorisation Number: 1011808841479

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Ruling

Subject: CGT-change in underlying ownership

Question 1

Have the shares stopped being pre-CGT assets for the purpose of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answers

No.

Question 2

Is the rulee taken to have acquired the shares before 20 September 1985 for the purposes of the following provisions:

paragraph 104-10(5)(a) of the ITAA 1997

paragraph 104-25(5)(a) of the ITAA 1997

subsection104-55(6) of the ITAA 1997

subsection 104-60(6) of the ITAA 1997

subsection 104-75(4) of the ITAA 1997

subsection 104-80(4) of the ITAA 1997

subsection 104-85(4) of the ITAA 1997

subsection 104-135(5) of the ITAA 1997

subsection 104-220(4) of the ITAA 1997

Answers

Yes.

Question 3

Can the rulee disregard the capital gain or capital loss it makes on the shares under the preceding provisions?

Answers

Yes.

Question 4

Are the shares pre CGT assets for the purposes of subsection 104-250(5) of the ITAA 1997?

Answers

Yes.

This ruling applies for the following periods

Financial years ended 30 June 2011-2016

The scheme commenced on

1 July 2010

Relevant facts

As at 19 September 1985:

· the rulee was a discretionary trust

· the rulee held some of the ordinary shares in the company with the other trusts also holding an equal number of ordinary shares each.

· the trusts also held shares in another company.

The following relevant events occurred after 19 September 1985:

· there were changes to the trustee of the rulee;

· the shares were converted to different class shares;

· the other class shares were later acquired from the other trusts by the rulee and others;

· the trustee has not exercised its discretionary powers to appoint beneficiaries and all distributions made by the trustee since 19 September 1985 have been to the default beneficiary, the spouse or the issue of the default beneficiary; and

· there have been no amendments to the trust deed which has had the practical effect of a change of 50% or more in the underlying interests in the assets of the trust.

Relevant legislative provisions

Paragraph 104-10(5)(a) ITAA 1997

Paragraph 104-25(5)(a) ITAA 1997

Subsection104-55(6) ITAA 1997

Subsection 104-60(6) ITAA 1997

Subsection 104-75(4) ITAA 1997

Subsection 104-80(4) ITAA 1997

Subsection 104-85(4) ITAA 1997

Subsection 104-135(5) ITAA 1997

Subsection 104-205(5) ITAA 1997

Subsection 104-220(4) ITAA 1997

Section 149-10 of the ITAA 1997

Section 149-15 of the ITAA 1997

Section 149-30 of the ITAA 1997

Section 149-50 of the ITAA 1997

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Under section 149-10 of the Income Tax Assessment Act 1997 (ITAA 1997), an asset that a taxpayer acquired before 20 September 1985 (pre-CGT) is taken to be a pre-CGT asset only if the taxpayer was not, immediately before the start of the 1998-99 income year, taken under subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA 1936) or Subdivision C of Division 20 of Part IIIA of the ITAA 1936 to have acquired the asset on or after 20 September 1985; and the asset has not stopped being a pre-CGT asset of the taxpayer because of Division 149 of the ITAA 1997.

The rulee is not an entity mentioned in subsection 149-50(1) of the ITAA 1997; therefore it is a non-public entity. The provisions in Subdivision 149-B of the ITAA 1997 are relevant for the current purpose of determining whether the shares stop being pre-CGT assets.

Under subsection 149-30(1) of the ITAA 1997, an 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. This requires a measurement of the underlying interests.

Alternatively, 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 day, majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day, subsection 149-30(2) of the ITAA 1997 would apply. The Commissioner has discretion to overlook a lack of evidence of continuity of majority underlying interests and allow the pre-CGT status of the asset to continue as if the majority underlying interests had remain unchanged.

The expression beneficial interests as used in the definition of majority underlying interests is not defined however section 149-30 of the ITAA 1997 does contemplate the tracing-through of companies and trusts (including discretionary trusts).

The terms majority underlying interests, underlying interest and ultimate owner are defined in subsections 149-15(1), (2) and (3) of the ITAA 1997. Subsections 149-15(4) and (5) define when an ultimate owner indirectly has a beneficial interest in a CGT asset of another entity or in ordinary income that may be derived from a CGT asset of another entity.

For a company, a shareholder does not have any legal or equitable interest in the assets of a company (see Archibald Howie Pty Ltd v. Commr of Stamp Duties (NSW) (1948) 77 CLR 143). Thus a shareholder does not have any beneficial interest in the assets owned by the company. For a discretionary trust, a discretionary beneficiary has no interest in trust income (Gartside & Anor v. IR Commrs [1968] 1 All ER 121; Re Weir's Settlement MacPherson & Anor v. IR Commrs [1970] 1 All ER 297) at least not until the exercise of the trustee's discretion. Therefore it is difficult to see how the test as set out in subsection 149-30(1) of the ITAA 1997 could be satisfied.

Assistance is provided in Taxation Ruling IT 2340 Capital Gains: Deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired on or before that date where the terms underlying interest and majority underlying interest and section 160ZZS of the ITAA 1936 (the predecessor to Division 149 of the ITAA 1997) are discussed.

Taxation Ruling IT 2340 states:

2. The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets.

…

5. In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trust are in fact exercised.

6. Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application merely because distributions to members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion.

7. In such a case the Commissioner would, in terms of subsection 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed. ….

The Commissioner will adopt a look-through approach to a chain of companies or trusts to determine whether there have been any changes in the effective interests of natural persons.

At 19 September 1985, the rulee was a discretionary trust.

The rulee held ordinary shares and other trusts held the balance.

The creation of the different share classes did not change the majority underlying interests. The other class shares carried a limited right of return - some of the paid-up capital on the share after payment of the amount paid-up on the original class share with no right of participation in surplus assets. The original class shares continued to have full rights.

It should be noted that the conversion to multiple class shares does not affect the pre-CGT status of the shares held by the trusts as the relevant provision, namely, subsection 160M(7A) cannot apply to an asset acquired before 20 September 1985 (see subsection 160M(7B) of the ITAA 1936.)

Since 19 September 1985, any distribution has been to the respective default beneficiary, their spouse or the issue of the default beneficiary. Furthermore no amendment of a trust deed had the practical effect of a change of 50% or more in the underlying interests in the assets of that trust.

For the purposes of section 149-10 of the ITAA 1997, the preceding discussion in relation to the application of section 149-30 of the ITAA 1997 and the non application of subsection 149-50(1) of the ITAA 1997 apply equally to subsection 160ZZS(1) of the ITAA 1936 and Subdivision C of Division 20 of Part IIIA of the ITAA 1936 respectively.

Conclusion

The rulee continues to administer the trust for the benefit of the members of the families of the trust. The Commissioner is satisfied, or thinks it reasonable to assume that the same ultimate owners who had or would have majority underlying interests in the shares at 19 September 1985 continued to have the same majority underlying interests.

The shares remain pre-CGT assets of the rulee for the purposes of Division 149 of the ITAA 1997.

As the shares do not stop being pre-CGT assets of the rulee, subsection 149-30(1) of the ITAA 1997 does not apply and the shares retain their original acquisition date. The rulee is taken to have acquired the shares before 20 September 1985 for the purposes of the following provisions:

paragraph 104-10(5)(a) ITAA 1997

paragraph 104-25(5)(a) ITAA 1997

subsection104-55(6) ITAA 1997

subsection 104-60(6) ITAA 1997

subsection 104-75(4) ITAA 1997

subsection 104-80(4) ITAA 1997

subsection 104-85(4) ITAA 1997

subsection 104-135(5) ITAA 1997

subsection 104-220(4) ITAA 1997

Note: You also asked about the pre-CGT asset status of the shares under subsections 104-65(4) and 104-215(5) of the ITAA 1997. Subsection 104-65(4) has no application because the rulee is not a beneficiary of a trust. Subsection 104-215(5) has no application because the rulee is not an individual.

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