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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012824175193

Ruling

Subject: Capital Gains Tax - change in majority underlying interests in pre-CGT asset

Question 1

Will any capital gain or capital loss made on the proposed sale of the property be disregarded?

Answer

No.

Question 2

Does Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) operate to convert the pre-CGT asset owned by you to a post CGT asset when someone retires sometime on or after 20 September 1985?

Answer 2

Yes.

Question 3

Will the first element of the cost base or reduced cost base of the property be the market value as at the time the unit trust holder retired?

Answer 3

Yes.

This ruling applies for the following periods

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on

Before 20 September 1985

Relevant facts and circumstances

Before 20 September 1985 a partnership was set up with four partners (the Partnership).

A unit trust (the Trust) was set up at about the same time to supply a building for the Partnership.

Before 20 September 1985 the Trust purchased a property. The unit holders being the four partners each holding equal units in the Trust.

Before 20 September 1985 a partner retired from the Partnership and the Trust. They were given no monies on the retirement. At this time another person entered the Partnership and the Trust with a buy in amount paid to the Trust for a number of units in the Trust. The remaining amount was paid to the three remaining partners.

On or after 20 September 1985 one of the original partners retired from the Partnership and the Trust. There was no new partner or trust unit holder admitted at this time. The remaining partners in the Partnership and unit holders in the Trust were two of the original partners and the partner admitted just prior to 20 September 1985.

Some years later one of the original partners retired for the Partnership and the Trust. No new partner or unit trust holder was admitted at this time. The remaining units in the Trust went to the remaining two partners who had both been partners prior to 20 September 1985.

The proposed sale of the property is for a certain amount less selling costs.

Assumption

Assume that the sale of the property will happen during the ruling period.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 paragraph 104-10(5)(a)

Income Tax Assessment Act 1997 section 149-15

Income Tax Assessment Act 1997 section 149-30

Income Tax Assessment Act 1997 section 149-35

Income Tax Assessment Act 1997 section 109-5

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 112-20

Income Tax Assessment Act 1997 section 102-20

Reasons for decision

Question 1 & Question 2

Summary

Any capital gain or capital loss made on the proposed sale of the property will not be disregarded. Division 149 of the ITAA 1997 will operate to convert the pre-CGT asset owned by you to a post CGT asset sometime on or after 20 September 1985 when a partner retired.

Detailed reasoning

The broad effect of Division 149 of the ITAA 1997 is that where a taxpayer acquired an asset before 20 September 1985 and holds the asset on or after 20 September 1985, the taxpayer will be deemed to have acquired the property on or after 20 September 1985 if continuity of beneficial ownership in the relevant property of more than 50% is not maintained on or after 20 September 1985. The Division applies where there is a relevant major change in beneficial ownership, (for example, through a change in beneficial interest in trust property on or after 20 September 1985).

The continuity of ownership has to remain at more than 50%. In your case the change is exactly 50% so the continuity of ownership is 50% and not more than 50%. Section 149-15 of the ITAA 1997 defines majority underlying interests to be more than 50%.

As a result the property is deemed to be a post CGT asset as the majority underlying interests in the property have not been maintained after the time that the last partner retired.

Question 3

Summary

The first element of the cost base or reduced cost base of the property will be the market value as at the time the last person retired.

Detailed reasoning

Where an asset is deemed by section 149-30 of the ITAA 1997 to have been acquired on or after 20 September 1985, the asset will be taken to have been acquired on the date on which the continuity of beneficial ownership in the asset of more than 50% ceases to be maintained. The cost base for the purposes of determining future capital gains and losses on realisation of such an asset will be the market value of the asset on the date on which the asset is taken to have been acquired (section 149-35 of the ITAA 1997) by the application of section 149-30 of the ITAA 1997.

In your case the beneficial ownership of the property reduced to 50% as at the time on or after 20 September 1985 when there were two ultimate owners, who became the only and remaining unit holders of the Trust. 50% is not more than 50% therefore the test is not met. The asset has stopped being a pre-CGT asset as at the time the partner retired.


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