Edited version of your written advice

Authorisation Number: 1012709774749

Ruling

Subject: The pre-CGT status of goodwill

Question 1

Is the Commissioner satisfied that, at the relevant dates majority underlying interests in Company D's goodwill were held by ultimate owners who also had majority underlying interests in the goodwill as at 19 September 1985?

Answer

Yes.

This ruling applies for the following period

XX/XX/XXXX to XX/XX/XXXX

The scheme commenced on

XX/XX/XXXX

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.

1. Company D was established prior to September 1985 continues today.

2. The original capital of Company D was divided into two classes of shares. The original issued capital of Company D comprised 1 'A' Class share issued to Shareholder 1 and 'B' class share issued to shareholder 2.

3. Additional shares in each class were issued to new shareholders (controlling shareholders) prior to 1985.

4. As at 19 September 1985, the issued shares in Company D were held by controlling shareholders (over 50%) and other parties (remaining shares).

5. After 1985, Company D issued additional shares to the controlling shareholders for a nominal amount and the minority shares owned by the other shareholders were bought back.

6. All issued 'A' class shares and 'B' class shares were converted without consideration into a single class of ordinary shares and split.

7. The above share split did not affect the income and capital rights of these shares (i.e. they continued to have full income and capital rights).

8. A number of new shares then issued to new investors and Company D was subsequently listed on Australian Securities Exchange (ASX).

9. Nothing happened to Company D shares or its share capital between XX January 20XX and XX January 20XX.

10. At the time of the float Company D had issued shares totalling XX. However the shares held by controlling shareholders were subject to voluntary escrow

11. As part of the float, Company S, the sponsoring brokers to the share offer were granted XX options (exercisable at XX cents) for no consideration upon the quotation of Company D shares on the ASX.

12. Similarly, as part of the float, Company N, the corporate advisors to Company D were also granted XX options (exercisable at X cents) for no consideration upon the quotation of Company D shares on the ASX.

13. On XX/XX/20XX, one of the controlling shareholders transferred XX million shares to the other for a nominal value.

14. On XX/XX/20XX, the above XX million shares were released from voluntary escrow.

15. Company D issued shares on exercise of options in several occasions and those share issues increased the Company D shares.

16. Company D introduced a dividend reinvestment scheme and dividends subsequent thereto have been converted into shares and DRP shares were acquired by the controlling shareholders.

17. Small number of Company D shares were acquired by one of the controlling shareholders on the market during the year ended XX June XXXX.

18. Test Day 1, the controlling shareholders held XX of total number of issued shares Company D (which is over 50%).

19. On XX/XX/XXXX, a total of XX DRP shares were issued by Company D with XX DRP shares being issued to the controlling shareholders.

20. As at XX/XX/XXXX, total number of Company D shares held by the controlling shareholders was XX out of the total number of issued shares of Company D of XX (over 50%)

21. Few days later, the controlling shareholders sold certain number of shares to professional and sophisticated investors.

22. Test day 2, total number of Company D shares held by the controlling shareholders was over 50% of the total number of issued shares of Company D.

23. In the period from 19 September 1985 to Test Day 2, the controlling shareholders have continuously owned over 50% of the total issued shares of Company D.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 160ZZS

Income Tax Assessment Act 1936 subsection 160ZZSC(4)

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 Subdivision 149-C

Income Tax Assessment Act 1997 Subsection 149-30(2)

Income Tax Assessment Act 1997 Paragraph 149-50(1)(a)-(e)

Income Tax Assessment Act 1997 Subsection 149-55(1)

Income Tax Assessment Act 1997 Subsection 149-55(1B)

Income Tax Assessment Act 1997 Subsection 149-55(2)

Income Tax Assessment Act 1997 paragraph 149-55(2)(d)

Income Tax Assessment Act 1997 Subsection 149-55(5)

Income Tax Assessment Act 1997 Subsection 149-55(6)

Income Tax Assessment Act 1997 Subsection 149-60(1)

Income Tax Assessment Act 1997 Section 149-70

Income Tax Assessment Act 1997 Subdivision 960-H

Income Tax Assessment Act 1997 Section 960-220

Income Tax Assessment Act 1997 Subsection 960-225(1)

Income Tax Assessment Act 1997 Subsection 995-1

Reasons for decision

Application of Division 149

Division 149 makes provision for when a CGT asset of a public entity stops being a pre-CGT asset. The only asset owned by Company D on 19 September 1985 and still owned by company D as at Test day 2 is the goodwill of the business conducted by Company D.

Subdivision 149-C applies to the pre-CGT assets of a company whose shares are listed for quotation in the official list of an approved stock exchange (paragraph 149-50(1)(a)). Once Company D was listed on the ASX on XX/XX/XXXX, it became subject to Subdivision 149-C.

Section 149-70 states that an asset stops being a pre-CGT asset if the condition in subsection 149-60(1) is not satisfied.

Subsection 149-60(1) states that:

"On the basis solely of the evidence given to the Commissioner under subsection 149-55(1), the Commissioner must be satisfied that, or think it reasonable to assume that, at the end of the *test day, *majority underlying interests in the asset were had by *ultimate owners who also had *majority underlying interests at the end of the starting day. The starting day is: (a) a day the entity chooses under subsection (2); or (b) if no day is chosen - 19 September 1985."

As Company D has not chosen otherwise the starting day is 19 September 1985.

Subdivision 149-C

Test day

A test day is defined in subsection 149-55(2) as:

(aa) 30 June 1999,

(a) a day that is 5 years (or a multiple of 5 years) after 30 June 1999 …;

(b) if the entity is covered by paragraph 149-50(1)(a) or (e) - a day on which there is *abnormal trading in *shares in the company;

Section 995-1 states that abnormal trading has the meaning given by Subdivision 960-H.

Abnormal trading

Subsection 960-225(1) of Subdivision 960-H relevantly provides that there is abnormal trading if trading in the shares of a company is abnormal having regard to all relevant factors including these:

(a) the timing of the trading, when compared with the normal timing for trading in the company's shares;

(b) the number of shares traded, when compared with the normal number of the company's shares traded;

(c) any connection between the trading and any other trading in the company's shares

(d) any connection between the trading and a tax loss or other deduction of the company.

Subsection 960-225(1) applies tests comparing the actual trade in shares under consideration and the normal trade in shares. Subsection 960-225(1) also requires all of the listed factors to be considered to determine if there has been abnormal trading. Where one factor applies and other factors do not apply to offset that factor, that single factor may be the only relevant factor to be considered.

The operation of Subdivision 960-H is changed by subsection 149-55(5) for the purposes of the determining what is abnormal trading for the operation of section 149-55. Subsections 149-55(6) provides that an issue, redemption or transfer, or any other dealing, is a trading if, and only if, it changes the respective proportions in which ultimate owners have underlying interests in the CGT assets of the company.

On the relevant days, Company D issued, on the exercise of options, XX shares in total to two companies.

The issue of shares on the 'relevant days' changed the respective proportions in which 'the ultimate owners' have underlying interests in the CGT assets of Company D.

Options issued by a public company are not taken into consideration in determining whether an asset stops being a pre-CGT asset. However, the issue of shares when an option owner exercises its options constitutes a trading in shares as defined under subsection 960-220 (1).

The evidence provided by the Applicant indicates that the maximum number of shares actually available for trade on the ASX at the start of the day on XX/XX/XXXX was XX. The shares issued on exercise of options (in the period from XX/XX/XXXX to XX/XX/XXXX) increased the number of Company D shares to XX and constituted less than 1% of the issued shares in Company D at that point in time.

However, the issue of the above additional shares on exercise of options in Company D is considered to be part of abnormal trading of shares as per the following analysis.

Paragraph 6 of IT 2530 which deals with the former section 160ZZS in the Income Tax Assessment Act 1936 (ITAA 1936) states that:

The issue of additional units in a unit trust or additional shares in a company is for these purposes considered not to be part of normal trading of units or shares. Where there is such an issue it will be appropriate to carry out a factual examination to determine whether there has been a continuity of majority underlying interests in the assets of the unit trust or company.

Paragraph 59 of the Taxation Ruling TR 1999/4 states that:

"In our view, all public entities' were covered by Taxation Rulings IT 2361 and IT 2530. The Rulings indicated that the Commissioner would be satisfied in respect of two classes of entities referred to as 'public companies' and 'public traded unit trusts', that majority underlying interests in their pre-CGT assets had been maintained except when there was activity in the nature of a takeover or merger, or there were other major changes in the ownership of shares or units outside the conduct of normal trading in the shares or units, or when additional shares or additional units were issued."

Paragraph 62 of TR 1999/4 states that:

"It follows that the Rulings, in a practical sense, relieved listed public companies and publicly traded unit trusts from the obligation to monitor normal stock market transactions in their shares or units, or to monitor normal subscriptions or purchases of units in the case of certain publicly traded unit trusts, so long as they were not associated with activity in the nature of a takeover or merge. Issues of additional shares or additional units and other major changes that occurred outside the conduct of normal market trading still needed to be examined."

Paragraph 68 of TR 1999/4 states that:

"To avoid any inconsistency in the way subsection 160ZZSC(4) applies to listed public companies and publicly traded unit trusts, only events in the nature of a takeover or merger, issue of additional shares or additional units, or other major transaction, which occurred after 4 May 1989 are treated as triggering a test time required a listed public company or publicly traded unit trust to examine the underlying interests in its assets. If the public company or trust is required to make an examination it must take into account all changes of underlying interests that took place between 19 September 1985 and the test time."

Paragraph 70 of TR 1999/4 states that:

"Paragraph 4 of the Taxation Ruling IT 2561 advised taxpayers that a listed public company need not examine the majority underlying interests in its pre-CGT assets for the purposes of section 160ZZS as long as there were only normal transactions in its shares on a stock exchange that were not associated with activity in the nature of a takeover or merger. It went on:

'Major changes in the ownership of shares which occur outside the conduct of normal stock market trading, however, will call for careful examination, in the course of which regard will be paid to changes in shareholdings that have occurred in the course of normal trading on stock exchanges as well as to those related to the events that caused the examination to be made.'"

Paragraph 72 of TR 1999/4 states that:

"It follows that if there was any transaction associated with activity in the nature of a takeover or merger or any major change in the ownership of shares or units that was outside the conduct of normal trading, or any issue of additional shares or additional units, then the listed public company or publicly traded unit trust was required by law to make an examination of the majority underlying interests in its pre-CGT assets."

Accordingly, the issue of shares on the relevant dates on exercise of options needs further consideration to ascertain whether the issue of the above shares constitute abnormal trading.

Paragraph 77 of TR 1999/4 provides further clarifications in respect of normal transactions under subsection 160ZZSC(4) as follows:

"As a further concession, we also accept for the purposes of subsection 160ZZSC(4) that a listed public company or publicly traded unit trust was not required to examine the majority underlying interest in its pre-CGT assets when:

(a) the company or trust issued bonus shares or units, so long as all shareholders or unitholders were offered a number of shares or units in proportion to their existing holdings of ordinary shares in the company or units in the trust;

(b) Rights to acquire shares in the company or rights to acquire units in the unit trust are exercised, so long as all shareholders or unitholders were offered a number of rights in proportion to their existing holdings of ordinary shares in the company or units in the trust.

(c) The company or trust issued shares or units under a dividend reinvestment plan, so long as all shareholders or unitholders were eligible to participate under the plan, and those shareholders or unitholders who chose to participate were offered a number of shares or units in proportion to their existing holdings of ordinary shares in the company or units in the trust; or

(d) The company issued shares under an employee share acquisition scheme if the value of shares issued under the scheme in any year amounted to less than 5% of the company's existing issued share capital."

In the present case, while the rights to acquire shares in the company were exercised, it was not a case where all shareholders were offered a number of rights in proportion to their existing holdings of ordinary shares in the company. Accordingly, as the issue of shares on the 'relevant days' constitutes abnormal trading, pursuant to paragraph 149-55(2)(d), the 'relevant days' will be test days for Company D.

Extension of time to provide written evidence under subsection 149-55(1)

Subsection 149-55(1) of the ITAA 1997 requires a public entity to give the Commissioner within 6 months after each test day written evidence about majority underlying interests in an asset at the end of each test day. Subsection 149-55(1B) provides that the consequence of failing to give evidence is set out in section 149-70 (the asset stops being a pre-CGT asset).

Further information was supplied more than 6 months after the test day; therefore, the Commissioner must consider whether an extension of time to provide written information about majority underlying interests should be granted.

As soon as they became aware that the 'relevant days' were considered test days for the purposes of Division 149, the taxpayer requested the Commissioner to extend the time allowed to supply information under subsection 149-55(1).

The Commissioner has having regard to the taxpayer's circumstances, exercised his discretion under subsection 149-55(1) to allow further time to provide written evidence about the majority underlying interests in the goodwill of the business. This written evidence has already been provided.

Test Day 1: XX/XX/XXXX

Company D became a public company on XX/XX/XXXX. From that date, Company D is covered by paragraph 149-50(1)(a).

For Company D, as a public entity, a test day will occur on each day that is a five year multiple of 30 June 1999, i.e. on 30 June 2014, and on each day on which there is abnormal trading in the shares of Company D

Accordingly, XX/XX/XXXX is a 'test day' for Company D.

Test Day 2 - XX/XX/XXXX

Under the provisions of paragraph 149-55(2)(d), XX/XX/XXXX also constitutes a test day for Company D as on this day, the ultimate owners transferred XX shares each to professional and sophisticated investors. As the shares were offered specifically to professional and sophisticated investors it is considered to be abnormal trading. The number of shares traded (XX) is also considered significant. Accordingly, XX/XX/XXXX is a test day for Company D.

Company D have acknowledged that XX/XX/XXXX is a test day for them. The above share issues were reported to the Australian Taxation Officer (ATO) in XX/XXXX. Accordingly, this information has been provided to the ATO within the 6 months period as stipulated in subsection 149-55(1).

Change in majority underlying interests

The controlling shareholders owned over 50% of the Company D shares on issue on19 November 1985.

During the intervening years, controlling shareholders did not reduce their combined ownership interests below 50% of the issued shares of Company D. Accordingly, it is accepted that there has been no change in the majority underlying interest in goodwill of the business of the taxpayer at the end of all the relevant test days.

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).