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Edited version of your written advice
Authorisation Number: 1013117432106
Date of advice: 31 October 2016
Ruling
Subject: Majority Underlying Interest
Question and Answer
Will the three parcels of land owned by the Company stop being a pre-CGT asset pursuant to section 149-30 of the ITAA 1997?
No
This ruling applies for the following period
Year ending 30 June 2016
The scheme commenced on
1 July 2015
Relevant facts
The Company was first registered in the 1960’s. The records of the Company have not been adequately kept and so it is difficult to know the share ownership of the Company and any changes made since its inception.
The Company owns three pieces of land which were acquired prior to 20 September 1985.
Person A and their family wish to liquidate the Company and transfer the Land to the shareholder(s) as an in-specie distribution as part of that liquidation.
The Company has 5,003 issued shares with a single A, B and C class share and 5,000 ordinary shares now registered with ASIC in the name of Person A as beneficial owner. There is some confusion about whether the ASIC registration is correct.
ASIC records provided show the following shareholders from the Company’s 1993 Annual Return to ASIC:
Shareholder |
No of Shares |
Type |
Beneficially owned |
Joint holding |
The Trust |
5,000 |
Ord |
N |
N |
Person B |
1 |
Ord |
Y |
N |
Person C |
1 |
Ord |
Y |
N |
Person A |
1 |
Ord |
Y |
N |
ASIC records have changed since this time, being inconsistent year to year. ASIC records for 2012 show the shareholders as:
Shareholder |
No of Shares |
Type |
Beneficially owned |
Joint holding |
Person A |
5,000 |
Ord |
Y |
N |
Person A |
1 |
Ord |
Y |
N |
Person A |
1 |
Ord |
Y |
N |
Person A |
1 |
Ord |
Y |
N |
The Person A Family Trust (the Trust) was established by deed dated 22 August 1983. Person B, Person C and Person A were the original trustees of the Trust. Upon Person C’s death, Person D was appointed as an additional trustee. Upon Person B’s death, Person E was appointed as an additional trustee. ASIC records were not changed to reflect these changes.
While the Company’s reporting of shareholdings has been the disorganised the following shares were on issued by the company at 30 June 1984:
● 1 A Class Share
● 1 B Class Share
● 1 C Class Share
● 5000 Ordinary Shares
The extract from the Register of Members for the Company shows that on 22 August 1983 the Trust was allotted the 5,000 ordinary shares.
The company constitution is silent in relation to the rights attached to each share type; significantly, the constitution provides for an assortment of rights to any and all types of share the company could issue.
Clauses 3 and 4 of the Trust Deed allow for distributions to ‘Eligible Beneficiaries’.
‘Eligible Beneficiaries’ are defined in clause 2.09 of the Trust Deed as the ‘Primary Beneficiaries’ and the Associates of the ‘Primary Beneficiaries’. The primary beneficiaries are listed in the first schedule in the Trust Deed as:
● Person A; and
● Person D.
Clause 2.04 defines an “Associate” of a Primary Beneficiary as:
● Specified relative of the Primary Beneficiary;
● The trustee (in its capacity as trustee) of an Sub-Trust for the Primary beneficiary or the Primary beneficiary together with other Persons;
● Executors or administrators or other legal personal representatives of a deceased Primary Beneficiary and the widow widower and Specified Relatives of the deceased Primary beneficiary or any of them entitled thereto under or by virtue of the will of the deceased Primary beneficiary or under or by virtue of the rules relating to intestacy as one of his next-of-kin;
● Any charitable institution Person or Persons or Company however constituted whom the Trustee in its absolute discretion considers worthy of receipt of funds either for charitable or educational purposes or for the relief of poverty or religious scientific or public educational purposes in Australia including a public hospital or any hospital which is carried on by a society or association otherwise than for profit or gain to individual members thereof.
A Specified Relative defined in subclause 2.17
● In relation to a Primary Beneficiary means the grandparents parents brothers sisters spouses aunts uncles nieces nephews widows widowers children and grandchildren of the Primary Beneficiary and the expression includes the grandparents parents brothers sisters spouses aunts uncles nieces nephews widows widowers children and grandchildren of any of the aforesaid and for the purposes of the forgoing a child shall be deemed to include and adopted child.
In the last five years the Trust has made distributions to members of Person A’s family.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 149-30
Reasons for decision
Summary
It is reasonable to assume that for all practical purposes the majority underlying interests in the assets of the Company has not changed. The Commissioner will exercise his discretion under subsection 149-30(2) of the ITAA 1997 and thus, the assets of the business will remain a pre-CGT asset of the Company.
Detailed reasoning
Subdivision 149-A of the ITAA 1997 stipulates when a CGT asset 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 the ITAA 1936;
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 Division 149 of the ITAA 1997.
Former section 160ZZS(1) of the ITAA 1936 provided that an asset acquired on or before 19 September 1985 shall be deemed to have been acquired 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, the majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset.
Majority underlying interest was defined in subsection 160ZZRR of the ITAA 1936 to be:
“majority underlying interest” in relation to an asset, means more than one-half of:
a. the beneficial interest that natural persons hold (whether directly or indirectly) in the asset; and
b. the beneficial interests that natural persons hold (whether directly of indirectly) in any income that may be derived from the asset.
From the 1998-99 income year, the provisions of Subdivision 149-B of the ITAA 1997 determine when a CGT asset of an entity stops being a pre-CGT asset. Under section 149-30 of the ITAA 1997, an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985.
Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in:
● the asset; and
● any ordinary income that may be derived from the asset.
Subsection 149-15(2) of the ITAA 1997 provides that an ‘underlying interest’ means a beneficial interest that an ultimate owner may have in the asset or any ordinary income derived from the asset. An ultimate owner is defined to include an individual under subsection 149-15(3) of the ITAA 1997.
An ultimate owner indirectly has a beneficial interest in a CGT asset of another entity (that is not an ultimate owner) if they would receive for their own benefit any of the capital of the other entity if:
● the other entity were to distribute any of its capital; and
● the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner.
Taxation Ruling No IT 2340 (IT 2340) discusses the application of former section 160ZZS of the ITAA 1936 in the context of discretionary trusts. Paragraph 2 of IT 2340 supports a ‘look through’ approach in relation to chains of companies, partnerships and trusts in order to determine whether there has been a change in the effective interests of natural persons in the assets.
Generally, a beneficiary of a discretionary trust does not have any legal or equitable interest in the assets or any income derived from the assets of the trust as their entitlement is subject to the trustee exercising their discretion. However, paragraph 6 of IT 2340 provides that:
Where a trustee continues to administer a trust for the benefit of members of a particular family…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.
While the Company’s reporting of shareholdings has been the disorganised the following shares were on issued by the company at 30 June 1984:
● 1 A Class Share
● 1 B Class Share
● 1 C Class Share
● 5000 Ordinary Shares
The extract from the Register of Members for the Company shows that on 22 August 1983 the Trust was allotted the 5,000 ordinary shares.
The company constitution is silent in relation to the rights attached to each share type; significantly, the constitution provides for an assortment of rights to any and all types of share the company could issue.
Therefore, prior to 20 September 1985, the Trust held a majority underlying interest in the Company through its shareholdings. The trust is a discretionary trust and therefore, as specified in paragraph 2 of IT 2340, it is necessary to ‘look-through’ this trust to identify its ‘ultimate owners’. The changing of Trustees has no effect on the identification of ‘ultimate owners’.
Paragraph 5 of IT 2340 indicates that:
…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.
Paragraph 7 of IT 2340 states that when the trust is continued to be administered for members of a particular family, the Commissioner would ‘find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed.’
Clauses 3 and 4 of the Trust Deed are relevant in determining the application of paragraphs 5 and 6 of IT 2340 to the current circumstances. These two clauses provide for the distribution of any ordinary income or asset of the Trust. These clauses allow for distributions to ‘Eligible Beneficiaries’.
‘Eligible Beneficiaries’ are defined in clause 2.09 of the Trust Deed as the ‘Primary Beneficiaries’ and the Associates of the ‘Primary Beneficiaries’. The primary beneficiaries are listed in the first schedule in the Trust Deed as:
● Person A; and
● Person D
Clause 2.04 defines an “Associate” of a Primary Beneficiary as:
● Specified relative of the Primary Beneficiary;
● The trustee (in its capacity as trustee) of an Sub-Trust for the Primary beneficiary or the Primary beneficiary together with other Persons;
● Executors or administrators or other legal personal representatives of a deceased Primary Beneficiary and the widow widower and Specified Relatives of the deceased Primary beneficiary or any of them entitled thereto under or by virtue of the will of the deceased Primary beneficiary or under or by virtue of the rules relating to intestacy as one of his next-of-kin;
● Any charitable institution Person or Persons or Company however constituted whom the Trustee in its absolute discretion considers worthy of receipt of funds either for charitable or educational purposes or for the relief of poverty or religious scientific or public educational purposes in Australia including a public hospital or any hospital which is carried on by a society or association otherwise than for profit or gain to individual members thereof.
A Specified Relative defined in subclause 2.17
● In relation to a Primary Beneficiary means the grandparents parents brothers sisters spouses aunts uncles nieces nephews widows widowers children and grandchildren of the Primary Beneficiary and the expression includes the grandparents parents brothers sisters spouses aunts uncles nieces nephews widows widowers children and grandchildren of any of the aforesaid and for the purposes of the forgoing a child shall be deemed to include and adopted child.
In the last five years, the Family Trust has made distributions to its beneficiaries. The primary beneficiaries of the Family Trust have always been Person A and Person D. The general class of beneficiaries include members of the family or companies or trusts in which those family members had an interest.
Thus, the ultimate beneficial owners continue to be Person A, Person D and members of the family. Therefore, Division 49 of the ITAA 1997 will not apply and the assets will remain pre-CGT assets.
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