Edited version of your written advice

Authorisation Number: 1012926899116

Date of advice: 11 December 2015

Ruling

Subject: Pre capital gains tax (CGT) asset

Question 1

Was the land a pre-CGT asset as defined under section 149-10 of the Income Tax Assessment Act 1997 (ITAA 1997) at all times on and after 20 September 1985 to the date of the contract of sale?

Answer

Yes.

Question 2

If the land was not a pre-CGT asset at all times on and after 20 September 1985 to the date of the contract for sale, when did the land stop being a pre-CGT asset as defined under section 149-10 of the ITAA 1997?

Answer

Not applicable.

This ruling applies for the following period:

1 July 2014 to 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You are an Australian proprietary company limited by shares.

You were incorporated before 19 September 1985.

Shareholding immediately prior to 20 September 1985

The shareholding immediately prior to 20 September 1985 was:

Events post 19 September 1985 - prior to 1 July 1998

Shareholder 7 transferred their shares to Shareholder 1.

Shareholder 1 transferred the shares previously own by Shareholder 7 to Shareholder 8.

Events post 19 September 1985 - after 30 June 1998

Shareholder 1 % Yes

Shareholder 1 % Yes

Shareholder 2 % Yes

Shareholder 3 % Yes

Shareholder 4 % Yes

Person 1 % Shareholder 5

Person 1 % Shareholder 6

Shareholder 7 % Yes

Under an agreement involving a scrip for scrip roll-over pursuant to subdivision 124-M of the ITAA 1997, you issued shares to Shareholders 1, 2, 3, 4, 5, 6 and 8.

Your articles of association were amended. As a consequence, the right attaching to some of Shareholder's 1 shares in regards to dividends was altered. The right became a right to receive by way of dividend declared by you from time to time any amount so declared to the exclusion of all other shares held in you. The amendment replaced the previous right which was a right to a fixed cumulative dividend of X% per annum and no further dividends.

You issued further shares to Shareholder 1, Shareholder 9 and Shareholder 10.

In addition, you resolved to split all shares on issue into Z shares and to amend the articles of association.

Shareholder 2 transferred shares to Company A. The shares transferred are held by Company A for its own benefit.

You are (and always have been) the sole shareholder of Company A.

As at the date of this ruling request, your shareholding is as follows:

Your first dividend payment was declared in the 20XX income year.

All dividend payments since your incorporation have been paid to Shareholder 1.

You acquired the land before 20 September 1985.

You entered into a contract for the sale of the land to an unrelated third party in the 20YY income year.

Relevant legislative provisions

section 149-10 of the ITAA

section 149-15 of the ITAA 1997

section 149-30 of the ITAA 1997

former section 160ZZS of the ITAA 1936

subsection 82KZC(1) of the ITAA 1936

Reasons for decision

Division 149 of the ITAA 1997 determines when an asset acquired on or before 19 September 1985 stops being a pre-CGT asset.

Section 149-10 of the ITAA 1997 states:

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 (ITAA 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.

In your case, the pre-CGT asset that is the subject to this ruling is the land.

Paragraph (a)

In respect to paragraph 149-10(a) of the ITAA 1997, you have stated that you acquired the land before 20 September 1985.

In your case, it is accepted that you acquired the land before 20 September 1985.

Paragraph (b)

In respect to paragraph 149-10(b) of the ITAA 1997, you state you were not taken immediately before the start of the 1999 income year to have acquired the asset on or after 20 September 1985 under either of:

• former subsection 160ZZS(1) of the ITAA 1936, or

• Subdivision C of Division 20 of former Part IIIA of that Act.

Former subsection 160ZZS(1) of the ITAA 1936 stated:

For the purposes of the application of this Part in relation to a taxpayer, an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset.

Taxation Ruling IT 2340 provides guidance on the administration of former 160ZZS of the ITAA 1936.

In order for an asset not to be deemed to have been acquired after 19 September 1985 due to the operation of former subsection 160ZZS(1) of the ITAA 1936, the Commissioner must be satisfied or consider it reasonable to assume, that the majority underlying interests in the asset have not changed during the period 19 September 1985 to 30 June 1998.

Former subsection 160ZZS(3) of the ITAA 1936 defined majority underlying interests when applying 160ZZS(1) as having the same meaning as in Subdivision 3G of Part III.

Majority underlying interests is defined in subsection 82KZC(1) of the ITAA 1936 to mean more than one-half of:

(a) The beneficial interests that natural persons hold (whether directly or through one or more interposed companies, partnerships or trusts) in the property, and

(b) The beneficial interests held by natural persons (whether directly or through one or more interposed companies, partnerships or trusts) in any income that may be derived from the property.

To identify the ultimate owners who held beneficial interests in the asset and income just before 20 September 1985, it is necessary to look at the individual shareholders who would have been entitled to receive any capital and income distributions made by the company at that time.

Paragraph (c)

In respect to paragraph 149-10(c) of the ITAA 1997, it must be determined whether the land you acquired has not stopped being a pre-CGT asset because of current Division 149.

Subdivision 149-B applies to non-public entities and therefore applies to you because you are a private company.

Subsection 149-30(1) of the ITAA 1997 states:

The asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the assets were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985.

Subsection 149-30(2) of the ITAA 1997 states:

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 had by *ultimate owners who had *majority underlying interests in the asset immediately before that day, subsections (1) and (1A) apply as if that were in fact the case.

Subsection 149-15(1) of the ITAA 1997 defines majority underlying interests as

Majority underlying interests in a CGT asset consist of:

(a) More than X% of the beneficial interest that ultimate owners have (whether directly or indirectly) in the asset; and

(b) More than % of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

Subsection 149-15(2) of the ITAA 1997 defines an underlying interest as:

An underlying 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.

An ultimate owner is defined in subsection 149-15(3) of the ITAA 1997 to include an individual or companies whose constitution prevents it from making any distribution, whether in money, property or otherwise to its members.

Subsection 149-15(4) of the ITAA 1997 states:

An ultimate owner indirectly has a beneficial interest in a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if:

(a) The other entity were to distribute any of its capital, and

(b) The capital were then successively distributed by each entity interposed between the other entity and the ultimate owner.

Subsection 149-15(5) of the ITAA 1997 states:

An ultimate owner indirectly has a beneficial interest in ordinary income that may be derived from a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of a dividend or income if:

(a) The other entity were to pay that dividend or otherwise distribute that income, and

(b) The dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner.

Taxation Determination TD 2000/10 discusses the CGT consequences if a company converts its shares into a larger number of shares.

Paragraph 1 of TD 2000/10 states:

If a company converts its shares into a larger or smaller number of shares ('the converted shares') in accordance with section 254 of the C Law in that:

(a) The original shares are not cancelled or redeemed in terms of the C Law;

(b) There is no change in the total amount allocated to the share capital account of the company; and

(c) The proportion of equity owned by each shareholder in the share capital account is maintained;

no CGT event happens to the shareholder's original shares for capital gains purpose. Where there is a change in the form of the original shares, there is no change in their beneficial ownership. …

Paragraph 2 of TD 2000/10 states that the converted shares have the same date of acquisition as the original shares to which they relate. That is, if the original shares were acquired before 20 September 1985 (pre CGT shares), the converted shares have the same acquisition date.

Paragraph 4 of TD 2000/10 states:

Cancelling original share certificates and replacing them with new certificates as part of any conversion process does not change the result above, unless there is also a cancellation or redemption of the original shares in terms of the C Law. …

Taxation Ruling IT 2530 considers whether there can be an actual change in control as between shareholders without a change occurring in majority underlying interests in a pre-CGT asset and not trigger Division 149 of the ITAA 1936.

Paragraph 10 of IT 2530 discusses that if the persons who immediately before 20 September 1985 held more than one half of the underlying interests in an asset continue to hold more than one half of the underlying interests at all times on and after that date, there will be no change in the majority underlying interests in the asset. In these circumstances a change in the proportions in which the persons held interests in the asset would not have a bearing. The following example illustrates this point:

Immediately before 20 September 1985 underlying interests in an asset of a company were owned by four individuals in the following proportions:

 A - X%

 B - X%

 C - X%

 D - X%.

Following a change in the shareholding of the company after 20 September 1985, the underlying interests in the asset were owned by the individuals in the following proportions:

 A - X%

 B - X%

 C - X%

 D -X%

 E - X%.

The individuals who owned underlying interests both immediately before 20 September 1985 and after the change in ownership were A, B and C. Immediately before 20 September 1985 A, B and C between them owned more than one half of the underlying interests (that is, X%). After the change A, B and C between them still owned more than one half of the underlying interests (that is, X%). Accordingly, more than one half of the underlying interests in the company's asset continued to be held by the same persons. Section 149-30 would therefore not apply to deem the asset acquired by the company before 20 September 1985 to have been acquired on or after that date.

Beneficial interests in capital

To identify the ultimate owners who held beneficial interests in your capital just before 20 September 1985, it must be determined which individual shareholders would have been entitled to receive any capital distributions made by the company at that time.

In your case, just before 20 September 1985, the shareholders were:

The land immediately before the start of the 1999 income year would not have been taken to have been acquired on or after 20 September 1985 as at all times on or after 20 September 1985 to the 30 June 1998, the majority underlying interests in the land was held by the natural persons (the shareholders) who immediately before 20 September 1985 held the majority underlying interests in the land. Aside from Shareholder 7 disposing of their shares to Shareholder 1 who later on transferred those same shares to Shareholder 8 between 20 September 1985 and 30 June 1998, Shareholders 1, 2, 3, 4, 5 and 6, all being natural persons, as at all times on or after 20 September 1985 to the 30 June 1998 held the majority underlying interests in the land.

After 30 June 1998, there were further share transactions which included:

• shares being transferred to Company A,

• shares issued as a result of scrip for scrip rollover,

• shares issued to Shareholders 9 and 10,

• split all shares on issue into Z shares.

The table below shows your current shareholding and the shareholders percentage of shares as of the date of your ruling application.

The individuals who owned underlying interests both immediately before 20 September 1985 and after the changes in ownership were Shareholders 1, 3, 4, 5 and 6. Immediately before 20 September 1985 Shareholders 1, 3, 4, 5 and 6 between them beneficially owned more than one half of the underlying interests (that is X%). After the changes, Shareholders 1, 3, 4, 5 and 6 between them still owned more than one half of the underlying interests (that is, X%). Accordingly, more than one half of the underlying interests in the company's asset continued to be held by the same persons. Section 149-30 would therefore not apply to deem the land acquired by the company before 20 September 1985 to have been acquired on or after that date.

You have amended your articles of association to split all shares on issue into Z shares. At this point, there is no change in the total amount of share equity and the proportion of equity owned by each shareholder is maintained. The proposed split will not change the beneficial ownership of the shares. The share split will not change the majority underlying interest in you.

Splitting each share into Z will not cause Division 149 of the ITAA 1997 to apply to stop your shares being pre-CGT assets as the ultimate owners who continue to hold majority underlying interests in your the pre-CGT assets before 20 September 1985 continue to hold majority voting interests after the share split.

Therefore, Division 149 of the ITAA 1997 will not apply to stop the assets being pre-CGT assets if each share on issue is split into Z shares.

Based on this information, it is determined that more than X% of the beneficial interests in your capital were held by the same ultimate owners who held more than X% of the interest just before 20 September 1985.

Beneficial interests in income

Your articles of association contain discretionary dividend rights for your shareholders. It is acknowledged that one shareholder could benefit from all of the income associated with the land to the exclusion of the other shareholders. You have advised that dividends were paid since your incorporation but only from 1 July 2006. Consequently between Shareholders 1, 3, 4, 5 and 6, they all held a beneficial interest in your income. As a result, more than X% of the beneficial interests in your income have been held by the same ultimate owners who held more than X% of the interest just before 20 September 1985 up to 30 June 1998.

Further amendments were made to the articles of association affecting dividend rights after 30 June 1998.

The articles of association were amended which altered the dividend rights attached to some of Shareholder 1's shares. The right became a right to receive by way of dividend declared by you from time to time any amount so declared to the exclusion of all other shares held in you. The amendment replaced the previous right which was a right to a fixed cumulative dividend of X% per annum and no further dividends.

The amendments to the articles of association did not cause Division 149 to apply to stop your land being pre-CGT asset. The ultimate owners of Shareholders 1, 3, 4, 5 and 6 continued to hold more than X% of the beneficial interest in your income even though you may use your discretion to allocate income to the exclusion of other shareholders. The majority underlying interests in the land (the pre-CGT asset) just before 20 September 1985 continued to do so after the articles of association was amended.

Based on the above information, the Commissioner is satisfied and considers it reasonable to assume that at all times on and after 20 September 1985 and up to the date of the contract of sale, the majority underlying interests in the land were held by the ultimate owners who had the majority underlying interests in the land immediately before 20 September 1985.

Question 2

Summary

It has been determined at Question 1 that the land is a pre-CGT asset at all times on and after 20 September 1985 to the date of the contract for sale. The land did not stop being a pre-CGT asset as defined under section 149-10 of the ITAA 1997.

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).