Edited version of private advice

Authorisation Number: 1012614715890

Subject: Capital gains tax - disposal - pre capital gains tax shares - no change in majority underlying ownership

Question:

Is the capital gain or capital loss made on the disposal of your 50% interest in shares acquired prior to 20 September 1985 disregarded?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2014

The scheme commenced on:

1 July 2013

Relevant facts:

You were the owner of a number of shares that were acquired by you prior to 20 September 1985.

The shares are in a private Company.

After a period of time you transferred your shares from sole ownership to joint ownership with your spouse.

You will transfer your ownership of your interest in the remaining 50% to your child.

The resulting ownership of the shares will be that your spouse and child will be joint owners of the shares.

You are transferring the shares as part of succession planning and you will receive no capital proceeds.

Since 20 September 1985 there has been no change in the majority underlying interests.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 102-25

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 Section 112-20

Income Tax Assessment Act 1997 Section 149-15

Income Tax Assessment Act 1997 Section 149-30

Reasons for decision:

Capital gains tax

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) is incurred when a CGT event takes place and you receive either a capital gain or a capital loss. A capital gain is not treated as a separate tax; your net capital gain is added to your annual income and you are taxed at your marginal tax rate.

The most common CGT event is CGT event A1.  Section 104-10 of the ITAA 1997 provides that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of an asset to someone else, or acquire an asset from someone else.

Majority underlying interests in a CGT asset

Division 149 of the ITAA 1997 contains provisions which govern when an entity's CGT asset ceases being a pre-CGT asset and is treated as having been acquired after that date.

Section 149-15 of the ITAA 1997 explains that majority underlying interests in a CGT asset consist of more than 50% of the beneficial interests that ultimate owners have in an asset, or in ordinary income that may be derived from the asset.

Underlying interest simply means a beneficial interest that an ultimate owner may have in the asset or any ordinary income derived from the asset.

In turn, an ultimate owner is defined to mean an individual or an entity listed in section 149-15(3) of the ITAA 1997. The listed entities comprise:

a company whose constitution prevents it from making any distribution to its members. Typically, the constitution of a non-profit company limited by guarantee with charitable or philanthropic objects would contain such a restriction; or

government bodies including:

• the Commonwealth, a state or a territory

• a municipal corporation

• a local governing body, and

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

Subsection 149-30(1) of the ITAA 1997 provides that an asset of a non-public entity ceases being a pre-CGT asset when majority underlying interests in the asset were not held by the same ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985.

The CGT provisions apply to the asset as if:

• the entity had acquired it at the time when the continuity of majority underlying interests ceased; and  

• the first element of the cost base and reduced cost base of the asset is its market value at that time.

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 held by the same ultimate owners who held majority underlying interests in the asset immediately before that day, the asset continues to be a pre-CGT asset.

In your situation, as there has been no change in majority underlying ownership, the capital gain or capital loss made on the disposal of the shares will be disregarded.

Note: the cost base of the shares that your child and spouse receive will be calculated in accordance with the market value substitution rule contained in section 112-20 of the ITAA 1997.

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