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Edited version of your private ruling
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Ruling
Subject: capital gains tax
Question
Has the pre-capital gains (CGT) asset acquired by you become a post-CGT asset pursuant to section 149-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This ruling applies for the following periods:
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You started a business as a sole trader.
You transferred the business to a company.
100% of the shares were beneficially held by you.
The company retained the pre-capital gains tax status of the business goodwill.
You sold more thanX% of your shares to unrelated parties.
You have maintained a less than X% shareholding in the company at all times since.
You plan to sell down your shares over time.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 149,
Income Tax Assessment Act 1997 section 149-10,
Income Tax Assessment Act 1997 section 149-15 and
Income Tax Assessment Act 1997 section 149-30.
Reasons for decision
A capital gains tax (CGT) asset is a pre-CGT asset if it was last acquired prior to 20 September 1985, and no income tax provision has operated to treat it as having been acquired after that date.
Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) contains provisions which govern when an asset held by an entity stops being a pre-CGT asset and is treated as having been acquired after that date. Entities affected by Division 149 of the ITAA 1997 are principally companies and trusts.
Section 149-10 of the ITAA 1997 defines what a pre-CGT asset is in relation to Division 149 of the ITAA 1997 as follows:
A CGT asset that an entity owns is a pre-CGT asset if, and only if:
(a) the entity last acquired the asset before 20 September 1985; and
(b) the entity was not, immediately before the start of the 1998-99 income year, taken under:
(i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936; or
(ii) Subdivision C of Division 20 of former Part IIIA of that Act;
to have acquired the asset on or after 20 September 1985; and
(c) the asset has not stopped being a pre-CGT asset of the entity because of this Division.
Each condition will be examined to determine if the shares are a pre-CGT asset.
Condition (a) will be satisfied as you are taken to have acquired the asset prior to 20 September 1985.
Condition (b) will also be satisfied as there was no change in ownership prior to the 1998-99 financial year.
Underlying interest and majority underlying interest
Section 149-30 of the ITAA 1997 provides that an assets stops being a pre-CGT asset when the majority underlying interest in the asset stop being held by the pre 20 September 1985 owners.
Section 149-15 of the ITAA 1997 details that the majority underlying interest in a CGT asset consists of more than 50% of the beneficial interests that the ultimate owners have in the asset and more than 50% of the beneficial interest that ultimate owners have in any ordinary income that may be derived from the asset.
An ultimate owner refers to an individual, a company whose constitution prevents it from making any distribution, the Commonwealth, a State, a Territory, a municipal corporation, a local governing body or the government of a foreign country or of part of a foreign country.
In your case, you held a percentage of the underlying interests prior to 20 September 1985. After 1985, the business was transferred to a company. At this point in time you still held a percentage of the underlying interest in the company. You sold more than X% of your shares in the company. From this point in time the majority underlying interest in the asset was no longer held by the person who immediately held it before 20 September 1985. Therefore, section 149-30 of the ITAA 1997 will apply and your shareholding will no longer be considered a pre-CGT asset.
Conclusion
As the asset has stopped being a pre-CGT asset of yours due to Division 149, condition (c) in section 149-10 of the ITAA 1997 will not be satisfied. Therefore, the shares will not retain their pre-CGT status.
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