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Ruling

Subject: Income Tax: Capital Gains Tax: Majority Underlying Ownership

Question 1

Is the Commissioner satisfied, or does the Commissioner think it reasonable to assume under subsection 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997), that at all times on and after 20 September 1985 and before a particular time majority underlying interest in the property, held by the company, were had by ultimate owners who had majority underlying interests in the property immediately before that day?

Answer

Yes

Question 2

If the Commissioner is not satisfied or does not think it reasonable, at what time does the Commissioner determine that the majority underlying interests in the were not held by ultimate owners who had majority underlying interests in the property immediately before 20 September 1985?

Answer

Not Applicable

This ruling applies for the following period

Financial year ended 30 June 20ZZ

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The company acquired the property before 20 September 1985.

Partners acquired X% shares (Y% each) in the company before 20 September 1985.

A Pty Ltd as Trustee (the trustee) for Family Trust (the trust) was issued X% shares in the company before 20 September 1985.

After the spouses death after 19 September 1985 the other spouse inherited their Y% shares. The other spouse then transferred a share to the trustee after 19 September 1985.

There were some amendments to the trust deed after 19 September 1985 in order to include and exclude the family members and change of appointors with the powers of trustee on the trust deed.

However, the trustee has owned X% shares in the company since the date of acquisition (pre-CGT)

Relevant legislative provisions

Income Tax Assessment 1997 subsection 149-15(1)

Income Tax Assessment 1997 subsection 149-15(2)

Income Tax Assessment 1997 subsection 149-15(3)

Income Tax Assessment 1997 subsection 149-15(4)

Income Tax Assessment 1997 subsection 149-15(5)

Income Tax Assessment 1997 subsection 149-30(1)

Income Tax Assessment 1997 subsection 149-30(2)

Income Tax Assessment 1997 subsection 149-30(3)

Income Tax Assessment 1997 subsection 149-30(4)

Income Tax Assessment 1997 section 149-50

Does Part IVA, or any other anti-avoidance provision, apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Question 1

Summary

The Commissioner is satisfied under subsection 149-30(2) of the ITAA 1997, that at all times on and after 20 September 1985 and before a particular time majority underlying interest in the property, held by the company, were had by ultimate owners who had majority underlying interests in the property immediately before that day.

Detailed reasoning

The provisions of Subdivision 149-B of the ITAA 1997 determine when a CGT asset of an entity stops being a pre-CGT asset (unless the entity is a public entity listed in section 149-50 of the ITAA 1997). This happens 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.

The terms 'ultimate owner' and 'majority underlying interest' are central to the operation of Division 149 of the ITAA 1997.

Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 to mean more than 50% of the beneficial interests that ultimate owners have, whether directly or indirectly, in the asset and in any ordinary income that may be derived from the asset.

Underlying interest is defined in subsection 149-15(2) of the ITAA 1997 as an 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.

Subsections 149-15(4) and 149-15(5) of the ITAA 1997 establish when an ultimate owner indirectly has a beneficial interest in the pre-CGT asset of another entity or ordinary income that may be derived from that asset. To have a beneficial interest, the ultimate owner must be entitled to receive for their own benefit any distribution of capital or income if:

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

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

It is possible for the ultimate owners to alter the way in which they hold their pre-20 September 1985 interest in an asset (or in the income derived from it) without affecting the pre-CGT status of that asset. For example, a new entity could be interposed between the entity that directly owns the asset and the ultimate owners. Or a pre-CGT asset could be transferred to another entity that is taken to have acquired the asset just before 20 September 1985 under a CGT same asset roll-over.

In the absence of express statutory modification, the identification of the ultimate owners who held beneficial interests in the asset and in any income derived from its use, just before 20 September 1985 is not affected by any changes which happen following that time. Subsection 149-30(1) of the ITAA 1997 refers to the majority underlying interests in the asset immediately before 20 September 1985. These are worked out by applying the definitions in section 149-15 of the ITAA 1997 to the facts in existence at that time.

Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner by way of a marriage breakdown rollover or because of the death of a person (former owner), the 'new owner' is treated as having held the underlying interest of the 'former owner' for the period the 'former owner' held them.

In this case the other spouse acquired Y% shares on their spouses death after 19 September 1985. Under subsections 149-30(3) and (4) of the ITAA 1997 the other spouse acquired the shares on at the date on which the spouse acquired it (pre-CGT).

Discretionary Trust:

Under ordinary legal concepts, where there is a discretionary trust deed, no beneficiary is entitled to income or capital of the trust until the trustee exercises its discretion to distribute income or to make an appointment of capital. Because the beneficiary of a discretionary trust does not hold an interest in any asset of the trust or in the ordinary income derived from the asset until the trustee's discretion is exercised, it would not be possible for a discretionary trust to satisfy the continuing majority underlying interests test set out in subsection 149-30(1) of the ITAA 1997.

Taxation Ruling IT 2340 reflects on an approach of looking through interposed entities to determine which natural persons hold the beneficial interests for the purposes of section 160ZZS of the ITAA 1936, which preceded Division 149 of the ITAA 1997, is reflected in Taxation Ruling IT 2340. Among other issues, IT 2340 deals with questions regarding the application of section 160ZZS of the ITAA 1936 'to assets held by trustees of family trusts where the trustees are vested with discretionary powers as to distributions from the trusts.'

Taxation Ruling IT 2340 states at paragraph 5 that it will be relevant to take into account the way in which the discretionary powers of the trustee are exercised when considering the question whether majority underlying interests have been maintained in the assets of the trust. IT 2340 continues in paragraphs 6-7:

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 family 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 sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed....

Taxation Ruling IT 2340 correctly reflects the position that section 160ZZS of the ITAA 1936, by its terms, necessarily supplants normal legal concepts of interests in assets. For the purposes of section 160ZZS of the ITAA 1936, a beneficiary of a discretionary trust is treated as having a beneficial interest in the trust's assets. Likewise, a shareholder is treated for the purposes of section 160ZZS of the ITAA 1936 as having a beneficial interest in the company's assets.

In this case the trustee acquired X% of the shares in the company before 20 September 1985.

There were some amendments to the trust deed after 19 September 1985 with the powers of the trustee in order to include and exclude some family members.

However, the trustee owns X% of the shares since the date of acquisition (pre-CGT). As per paragraphs 6 and 7 of Taxation Ruling IT 2340 the trustee continues to administer the trust for the benefit of the members of the family. Therefore, the shares maintain the pre-CGT status.

Further, the other spouse owns more than Y% pre-CGT shares. Accordingly, the other spouse and the trust own more that X% of the shares which maintains the pre-CGT status. Therefore, majority underlying interest under subsection 149-15(1) of the ITAA 1997 is satisfied.

Therefore, the Commissioner is satisfied under subsection 149-30(2) of the ITAA 1997, that at all times on and after 20 September 1985 and before a particular time majority underlying interest in the property, held by the company, were had by ultimate owners who had majority underlying interests in the property immediately before that day.

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