Edited version of your written advice

Authorisation Number: 1051259965517

Date of advice: 2 August 2017

Ruling

Subject: Majority underlying interest in pre-CGT asset

Question 1

Have the majority underlying interests in the pre-capital gains tax (CGT) assets of the Taxpayer changed since immediately before 20 September 1985 such that section 149-30 of the Income Tax Assessment Act 1997 (ITAA 1997) will stop the asset from being a pre-CGT asset?

Answer

No

This ruling applies for the following periods:

Income year ended 30 June 2018

The scheme commences on:

19XX

Relevant facts and circumstances

The Taxpayer is a private company and was incorporated before 20 September 1985.

Before 20 September 1985 the Taxpayer purchased the Property.

The Taxpayer proposes to sell the Property.

The shareholders of the Taxpayer as at 19 September 1985 were A and B and C. (the Pre-CGT share owners).

Their shareholding was as follows:

A – XX% of shares

B – XX% of shares

C – XX% of shares

All of the shares have equal rights.

After 19 September 1985 until the date of A’s death there were changes in the share ownership of the Taxpayer.

At 1 July 200A the shareholdings in the Taxpayer held by the pre-CGT share owners were as follows:

A – YY% of shares

B – X% of shares

C – ZZ% of shares

The family trust

The Y Family Trust (“the Family Trust”) was established in mid 200A.

C’s shares in the Taxpayer were transferred to the Family Trust in mid 200A. At the time of the transfer, C was suffering from personal issues and it was agreed that their shares be transferred to the Family Trust which is controlled by their siblings and a relative for their benefit. The directors of the Family Trust trustee, Y Pty Limited, are the siblings and relative of C. They are also the appointers of the Family Trust.

The primary beneficiary of the Family Trust is C.

The classes of beneficiaries of the Family Trust as per the trust deed includes C, their spouse, their issue and any relative of C, such as their parents, and siblings.

All of the income and capital of the Family Trust has been distributed to C since mid 200A.

The trustee has resolved to pay, apply or set aside the income of the Family Trust for the year ending 30 June 201B to C.

The Family Trust deed has not been amended.

The deceased estate

A died in late 200C.

At the time of A’s death the shareholding held by the pre-CGT shareholders in the Taxpayer was as follows:

A – YY% of shares

B – X% of shares

C – X% of shares

The Family Trust held the ZZ% of shares that previously belonged to C, as set out above.

Clause 3 of A’s will (the Will) provides:

I GIVE all of my interest to those of my children as survive me by thirty (30) days as tenants in common and equal shares if more than one.

Probate was granted in 201D.

There was a delay in transferring the shares to the beneficiaries of the estate as A’s shares had to be converted to a larger number of shares divisible by the number of their surviving children, in order to provide the beneficiaries of the estate with equal shares.

This was done and the shares were then transferred to A’s beneficiaries in accordance with the Will.

Dividends were paid directly to the beneficiaries of the deceased estate in accordance with the Will, while legal transfer of the shares was in progress.

Assumption(s)

1. Other than the legal transfer of shares to beneficiaries of the deceased estate, in accordance with the Will, there are no other changes in shareholdings expected to occur between the ruling date and the sale of the Property.

2. Future distributions from the Family Trust will be limited to C up to and including the financial year in which all pre-CGT property of the company is sold.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 section 149-15

Income Tax Assessment Act 1997 subsection 149-15(1)

Income Tax Assessment Act 1997 subsection 149-15(3)

Income Tax Assessment Act 1997 subsection 149-15(4)

Income Tax Assessment Act 1997 section 149-30

Income Tax Assessment Act 1997 subsection 149-30(1)

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

Income Tax Assessment Act 1997 subsection 149-30(3)

Income Tax Assessment Act 1997 subsection 149-30(4)

Reasons for decision

All legislative references are to ITAA 1997, unless stated otherwise.

Division 149 contains the rules stipulating when an asset stops being a pre-CGT asset.

Section 149-10 defines what is meant by a pre-CGT asset:

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; 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.’

Subsection 149-30(1) provides that an asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985.

Subsection 149-30(2) states that if the Commissioner is satisfied, or thinks it is 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 assets immediately before that day, subsection 1 applies as if that were in fact the case.

Subsection 149-15(1) provides that the majority underlying interests in a CGT asset consist of:

(a) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

(b) 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.

Subsection 149-15(3) provides that an ultimate owner can be an individual.

Subsection 149-15(4) provides that 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 the other entity were to distribute any of its capital and the capital were then successfully distributed by each entity interposed between the other entity and the ultimate owner.

Transfer of 70 shares from C to the Family Trust

Up until just before 1 July 200A when C transferred their shares in the Taxpayer to the Family Trust, XY% of the majority underlying interests in the Property were had by A and C, who were also the majority underlying interest holders in the Property immediately before 20 September 1985 (XZ%).

C’s shares were transferred to the family trust because C suffered from personal issues and it was agreed that their shares be transferred to the Family Trust which is controlled by members of their family for their benefit.

All of the income and capital of the Family Trust has been distributed to C since 1 July 200A.

Income Tax Ruling IT 2340 Income Tax: Capital Gains: Deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date (IT 2340) discusses the terms “underlying interest” and “majority underlying interest” as they applied to former section 160ZZS of the Income Tax Assessment Act 1936 (since rewritten in sections 149-30 and 149-35 of the ITAA 1997).

Paragraph 5 to 7 of IT 2340 state:

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 underling 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 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 n 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. [emphasis added]

IT 2340 provides guidance in relation to interests held by discretionary trusts, to take into account the way in which the discretionary powers of the trustees are in fact exercised (as per paragraph 5), in considering the question of whether majority underlying interests have been maintained.

However IT 2340 does not allow an owner of original interests to transfer their interests to a family trust post 19 September 1985 and allow the trustee of the family trust to administer their discretionary powers for the benefit of someone other than the original interest holder in a way that would result in a change of majority of the underlying interests (paragraphs 6 and 7).

The shares in the Taxpayer did not form part of the assets of the Family Trust at 19 September 1985 and these shares were only transferred to the trust on 1 July 200A. Therefore, if the trustee of the Family Trust administers the trust for the benefit of members other than the original interest holder, then the Commissioner considers that Division 149 is triggered where the majority underlying interests in the Property are not maintained. This is because, under paragraph 149-15(1)(b) and subsection 149-15(4) ultimate ownership of the Property will be extended to individuals other than C.

The Commissioner considers the following factors as relevant in considering subsection 149-30(2):

(i) shares were transferred to the Family Trust due to personal issues experienced by C

(ii) the Family Trust was administered for C’s benefit by their family members

(iii) C received all revenue and capital distributions made by the Family Trust since it was established

Therefore the Commissioner is satisfied that for the purposes of Division 149 that C is the underlying owner of the shares held in the Taxpayer by the Family Trust. Accordingly, the transfer of XX shares from C to the Family Trust on 1 July 200A and the subsequent actions of the trustee have not triggered Division 149.

Deceased estate of A

A held XX% of the underlying interest in the Property at 19 September 1995 and YY% at the time of their death in late 200C.

According to their will, their shares in the Taxpayer have been bequeathed in equal shares to their children.

Subsections 149-30(3) and 149-30(4) provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner by way of death of a person (former owner), the 'new owner’ is treated as having held the underlying interest of the 'former owner’ for the period the 'former owner’ held them.

ATO ID 2003/778 Income Tax CGT: majority underlying ownership and deceased estate-discretionary trust-beneficiary a 'new owner’ confirms that the beneficiaries of a testamentary trust can become the “new owner” for the purposes of subsections 149-30(3) and 149-30(4).

Therefore the transfer of shares in the Taxpayer to the beneficiaries of the Will and the interim arrangement whereby dividends were paid to beneficiaries, in accordance with the terms of the Will, pending the transfer of the shares, will satisfy the requirements subsections 149(3) and 149(4).

Conclusion

As at 19 September 1985, A and C held XZ% of the underlying interest in the Property. If there are no further changes to shareholdings in the Taxpayer and the trustee of the Family trust continues to distribute all income and capital distributions to C, the combined pre-CGT underlying interest held by ultimate owners in the Property, will be XY%.

Therefore, the Commissioner is satisfied that the majority underlying interest in the Property as at 19 September 1985 have been maintained in accordance with section 149-30.

The Property will retain its pre-CGT status.

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