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Edited version of your written advice
Authorisation Number: 1013043067619
Date of advice: 30 June 2016
Ruling
Subject: Capital gains tax - change in underlying ownership
Question 1
Have the shares acquired by the Trust prior to 20 September 1985 stopped being pre CGT assets for the purpose of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
Question 2
Can the Trust disregard the capital gain it makes on these shares under paragraph 104-25(5)(a) of the ITAA 1997?
Answer
Yes
This ruling applies for the following periods:
Financial years ended 30 June 2016 and 2017
The scheme commences on:
1 July 2015
Relevant facts and circumstances
As at 19 September 1985:
• The Trust was a discretionary trust.
• The Trust purchased shares in a company.
Post 19 September 1985 the Trust's shares in a company were cancelled.
The main beneficiaries of the Trust were at all times the children of the named beneficiary as well as their children.
There have been no amendments to the Trust deed to change the underlying interests in the assets of the Trust.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 149
Income Tax Assessment Act 1997 Section 149-15
Income Tax Assessment Act 1997 Section 149-30
Income Tax Assessment Act 1997 paragraph 104-25(5)(a)
Reasons for decision
Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the rules which govern when an asset acquired by a taxpayer before 20 September 1985 is treated as being acquired after that date for capital gains tax (CGT) purposes.
Under subsection 149-30(1) of the ITAA 1997, a pre-CGT asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interest in the asset were not had by the ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985.
Subsection 149-15(1) of the ITAA 1997 provides that majority underlying interests in a CGT asset consists of:
• more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and
• more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.
No changes in indirect beneficial interests
A beneficiary in a discretionary trust, such as the Trust, could not be said to have a beneficial interest in the income or assets of the trust, in the light of cases such as Gartside v IRC [1968] AC 553 and Re Weir's Settlement MacPherson & anor v. IRC [1970] 1 All ER 297.
However, paragraphs 5 to 7 of Taxation Ruling IT 2340 discuss what happens in respect of non-fixed family trusts and the application of the former section 160ZZS of the Income Tax Assessment Act 1936 (now Division 149 of the ITAA 1997):
5. In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised.
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. That is consistent with the role of the section to close potential avenues for avoidance of tax in cases where there is a substantial change in underlying ownership of assets and the legislative guidance contained in Subdivision G of Division 3 of Part III of the Act. On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provisions of the Act.'
The Trust acquired shares in a company prior to 20 September 1985. Distributions of income of the trust have been made to the X named children in accordance with the trust deed. Additionally, no amendment of the trust deed had the practical effect of a change of 50% or more in the underlying interests in the assets of that trust.
The Trust continues to operate for the benefit of the nominated beneficiaries. Taking the principles contained in IT 2340 into account, the beneficial interest in the shares are taken to have not changed since 19 September 1985.
The shares remain pre-CGT assets of the trust for the purposes of Division 149 of the ITAA 1997. Therefore, any capital gain made on the shares will be disregarded under paragraph 104-25(5)(a).
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