Edited version of your written advice

Authorisation Number: 1051265696981

Date of advice: 18 September 2017

Ruling

Subject: Capital gains tax

Question 1

Did the CGT assets acquired by Company A before 20 September 1985 (pre-CGT assets) continue to be pre-CGT assets immediately before the start of the 1998-99 income year, under former subsection 160ZZS(1) of the Income Tax Assessment Act 1936, for the purposes of subparagraph 149-10(b)(i) of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

As at 31 May 2015, did the pre-CGT assets acquired by Company A stop being pre-CGT assets of Company A pursuant to Division 149 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period

Income tax year ended 31 May 2015

The scheme commences on

DDMMYY

Relevant facts and circumstances

Company A is an unlisted public company. It is a private company within the meaning of section 103A of the ITAA 1936.

Company A adopts an accounting period ending on 31 May under section 18 of the ITAA 1936.

Company A chose DDMMYY as the ‘starting day’ for determining majority underlying interests under Division 149 of the ITAA 1997.

Assets

The 3 categories of assets (the assets) that were acquired by Company A prior to 20 September 1985 are:

(a) Land at Alpha Street;

(b) Land at Beta Street; and

(c) Goodwill of the business.

The land at Beta Street was sold in mid-late 201X.

Shareholders at 31 May 2015

Company A provided a list of the ultimate owners who held a majority of the interests in Company A at various times from immediately before 20 September 1985 to 31 May 2015.

XYZ Trust

XYZ Trust was established in 1972.

XYZ Trust has had the same beneficiaries from its establishment in 19XX.

XYZ Trust provided the Trust Deed.

XYZ Trust acquired XXX,XXX shares in Company A by 198X.

In 1990, XYZ Trust sold XXX,XXX shares to Individual A.

XYZ Trust vested in 199X according to the Trust Deed of the XYZ Trust as Beneficiary B who is the child of Individual A and Beneficiary A reached the age of 25.

In mid 199X, Individual A sold XX,XXX Company A shares to XYZ Trust.

XYZ Trust was wound up in a meeting of the trustees held on 30 June 199X.

XYZ Trust distributed XX,XXX Company A shares to the beneficiaries as below:

Deceased estates

There were several instances during the period 198X to 201X where Company A shares were transferred from deceased estates to the beneficiaries of the estates.

The underlying interests in Company A’s assets

The Beneficiary family held more than 20% of the underlying interests of XY from 198X through to 201X.

There were more than 30% of continued underlying interests in XY from 198X through to 31 May 201X as well.

Relevant legislative provisions

Section 103A of the ITAA 1936

Former subsection 160ZZR(1) of the ITAA 1936

Former subsection 160ZZRR(1) of the ITAA 1936

Former section 160ZZRU of the ITAA 1936

Former section 160ZZS of the ITAA 1936

Former subsection 160ZZS(1AA) of the ITAA 1936

Former subsection 160ZZS(1) of the ITAA 1936

Subsection 108-55(2) of the ITAA 1997

Division 149 of the ITAA 1997

Subdivision 149-C of the ITAA 1997

Section 149-10 of the ITAA 1997

Paragraph 149-10(a) of the ITAA 1997

Paragraph 149-10(b) of the ITAA 1997

Paragraph 149-10(c) of the ITAA 1997

Subparagraph 149-10(b)(i) of the ITAA 1997

Subparagraph 149-10(b)(ii) of the ITAA 1997

Section 149-15 of the ITAA 1997

Subsection 149-15(1) of the ITAA 1997

Subsection 149-15(2) of the ITAA 1997

Subsection 149-15(3) of the ITAA 1997

Subsection 149-15(4) of the ITAA 1997

Subsection 149-15(5) of the ITAA 1997

Subdivision 149-B of the ITAA 1997

Section 149-25 of the ITAA 1997

Section 149-30 of the ITAA 1997

Subsection 149-30(1) of the ITAA 1997

Subsection 149-30(2) of the ITAA 1997

Subsection 149-30(3) of the ITAA 1997

Subsection 149-30(4) of the ITAA 1997

Subdivision 149-C of the ITAA 1997

Paragraph 149-50(1)(a) of the ITAA 1997

Paragraph 149-50(1)(e) of the ITAA 1997

Subparagraph 149-50(1)(e)(i) of the ITAA 1997

Paragraph 149-50(2)(b) of the ITAA 1997

Subsection 149-55(1) of the ITAA 1997

Subsection 149-55(2) of the ITAA 1997

Subsection 149-55(6) of the ITAA 1997

Subsection 149-55(7) of the ITAA 1997

Section 149-60 of the ITAA 1997

Subsection 149-60(1A) of the ITAA 1997

Subsection 149-60(1) of the ITAA 1997

Subsection 149-60(5) of the ITAA 1997

Section 149-70 of the ITAA 1997

Subsection 149-70(1) of the ITAA 1997

Reasons for decision

Question 1

Detailed reasoning

Section 149-10 of the Income Tax Assessment Act 1997 (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.

Assets acquired before 20 September 1985

Company A acquired three categories of assets before 20 September 1985. The assets comprise of two parcels of land and the goodwill of Company A.

It is the land at Beta Street that is most relevant for the present purpose. This is because that property was sold in mid-late 201X and there may be capital gains tax (CGT) consequences for the land disposal.

However, under CGT rules, assets acquired before 20 September 1985 will remain outside the scope of CGT generally.

For companies that have acquired assets before 20 September 1985, it is necessary to consider whether there is a change of 50% or more in the underlying ownership of the assets on or after 20 September 1985. (Subsection 160ZZS(1) of the ITAA 1936 is the relevant provision before the 1999 financial year and Division 149 of the ITAA 1997 is relevant from the 1999 financial year.)

Former section 160ZZS of the ITAA 1936

Former section 160ZZS of the ITAA 1936 does not apply to a taxpayer that is a public entity in respect of an asset to which Subdivision C applies (former subsection 160ZZS(1AA) of the ITAA 1936).

‘Public entity’ is defined in former subsection 160ZZRR(1) of the ITAA 1936. It means a public company, a mutual insurance organisation or a publicly traded unit trust.

‘Public company’ is defined in subsection 160ZZRR(1) of the ITAA 1936. It means:

a) a listed public company; or

b) a company (other than a listed public company) all the shares in which are beneficially owned by any one or more of the following:

i) listed public companies;

ii) mutual insurance organisations;

iii) publicly traded unit trusts; or

c) a 100% subsidiary of a company to which paragraph (b) applies.

As Company A is an unlisted public company and it is not wholly owned by listed public companies, mutual insurance organisations or publicly traded unit trust, it is not a public company.

This means that Company A is not a ‘public entity’ according to the definition in former subsection 160ZZRR(1) of the ITAA 1936. Therefore, former section 160ZZS of the ITAA 1936 can apply to Company A (former subsection 160ZZS(1AA) of the ITAA 1936).

In respect of assets that Company A acquired on or before 19 September 1985, Company A must not be deemed to have acquired those assets after this date as a result of former subsection 160ZZS(1) of the ITAA 1936, which 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.

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

majority underlying interests, in relation to an asset, means more than one-half of:
(a)	the beneficial interests that natural persons hold (whether directly or indirectly) in the asset; and
(b)	the beneficial interests natural persons hold (whether directly or indirectly) in any income that may be derived from the asset.

To determine the majority underlying interests, it is necessary to determine the natural persons who held the beneficial interests in the assets of the XYZ Trust.

XYZ Trust

The XYZ Trust is a discretionary trust.

Under ordinary legal concepts, where there is a discretionary trust deed, no beneficiary is entitled to income or capital of the trust until the trustee exercises its discretion to distribute income or to make an appointment of capital.

Taxation 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 deals with questions regarding the application of section 160ZZS of the ITAA 1936 ‘to assets held by trustees of family trusts where the trustees are vested with discretionary powers as to distributions from the trusts.’

IT 2340 states at paragraph 5 that it will be relevant to take into account the way in which the discretionary powers of the trustee are exercised when considering the question whether majority underlying interests have been maintained in the assets of the trust. IT 2340 continues:

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. …

When considering the majority underlying ownership in deceased estate, ATO ID 2003/778 Income Tax: CGT: majority underlying ownership and deceased estate - discretionary trust - beneficiary a 'new owner' confirms that IT 2340 correctly reflects the position that section 160ZZS of the ITAA 1936 necessarily supplants normal legal concepts of interests in assets. For the purposes of section 160ZZS of the ITAA 1936, a beneficiary of a discretionary trust is treated as having a beneficial interest in the trust’s assets.

The beneficiaries of the XYZ Trust were defined in the XYZ Trust Deed to be:

a) Beneficiary A during her lifetime;

b) Four children of Individual A and Beneficiary A, namely:

i. Beneficiary B;

ii. Beneficiary C;

iii. Beneficiary D; and

iv. Beneficiary E;

c) Such other children of Individual A and Beneficiary A before Beneficiary B reaches 25 of age; and

d) Any of the grandchildren of Individual A and Beneficiary A before Beneficiary B attained the age of 25.

There were no other children of Individual A and Beneficiary A apart from the four listed in paragraph (b) above. Individual A and Beneficiary A also did not have any grandchildren before Beneficiary B reached 25 years old. Therefore, the five beneficiaries of the XYZ Trust were:

i. Beneficiary A;

ii. Beneficiary B;

iii. Beneficiary C;

iv. Beneficiary D; and

v. Beneficiary E

According to ATO ID 2003/778, these five beneficiaries of XYZ Trust are treated as having beneficial interests in XYZ Trust’s assets for the purposes of section 160ZZS of the ITAA 1936.

As the five beneficiaries of XYZ Trust as well as Individual A held Company A shares before 20 September 1985up to the 2014-15 income year, the change in the proportions in which they held interests in Company A would not have a bearing on the application of section 160ZZS (paragraph 10 of IT 2530 Income tax : capital gains : change in the underlying ownership of assets in a publicly traded unit trust : issue of new units in unit trusts and new shares in companies : interposed entities : calculation of change in majority underlying interests).

Deceased estate

Special rules applied, prior to the start of the 1998-99 income year, to work out majority underlying interests in an asset if an ultimate owner acquired an underlying interest in it because of the death of the former owner.

Former section 160ZZRU of the ITAA 1936 provided that, for the purposes of former Division 20 of Part IIIA of the ITAA 1936, if a natural person (‘new owner’) acquired an underlying interest in an asset because of the death of a person (‘former owner’), the new owner was treated as having held the underlying interest of the former owner over the years.

There were several instances before the 1998-99 financial year where Company A shares were transferred to new owners because of the death of the former owners. Former section 160ZZRU of the ITAA 1936 treated the new owners as having a percentage of the underlying interests in the asset equal to the lesser of the acquired percentage or the former owner’s percentage at that time.

Conclusion

Based upon the various evidence provided by the taxpayer, for the purposes of former subsection 160ZZS(1) of the ITAA 1936, the Commissioner is satisfied or finds it reasonable to assume that at all times after 19 September 1985 and before the start of the 1998-99 income year, more than one half of both, the beneficial interests in the properties and the beneficial interest in any income that may be derived by those persons were held by the same natural persons (whether directly or through one or more interposed entities).

Therefore, Company A was not immediately before the start of the 1998-99 income year taken under former subsection 160ZZS(1) of the ITAA 1936 to have acquired the pre-CGT assets on or after 20 September 1985 for the purposes of subparagraph 149-10(b)(i) of the ITAA 1997.

Note: Subparagraph 149-10(b)(ii) of the ITAA 1997 has no application to Company A as former Subdivision C of Division 20 of Part IIIA of ITAA 1936 applies to public entities, which Company A is not.

Question 2

Detailed reasoning

Following from the above Company A has satisfied paragraphs 149-10(a) and 149-10(b) of the ITAA 1997. Paragraph 149-10(c) of the ITAA 1997 further requires the assets of Company A to have not stopped being a pre-CGT asset because of Division 149.

Relevantly, section 149-15 of the ITAA 1997 defines the following terms:

(1) 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.

(2) 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.

(3) An ultimate owner is:

(a) an individual; or

(b) a company whose *constitution prevents it from making any distribution, whether in money, property or otherwise, to its members; or

(c) the Commonwealth, a State or a Territory; or

(d) a municipal corporation; or

(e) a local governing body; or

(f) the government of a foreign country, or of part of a foreign country.

(4) 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.

(5) 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.

Subdivision of 149-B of the ITAA 1997 provides the test of when an asset of a non-public entity stops being a pre-CGT asset. Section 149-25 of the ITAA 1997 states:

This Subdivision provides for when a *CGT asset of an entity stops being a *pre-CGT asset (unless the entity is covered by section 149-50).

Section 149-50 of the ITAA 1997 provides:

(1) This Subdivision provides for when a *CGT asset of an entity of any of these kinds stops being a *pre-CGT asset:

(a) a company *shares in which (except shares that carry the right to a fixed rate of *dividend) are listed for quotation in the official list of an *approved stock exchange;

(b) a *publicly traded unit trust;

(c) a *mutual insurance company;

(d) a *mutual affiliate company;

(e) a company (other than one covered by paragraph (a)) all the *shares in which are beneficially owned, whether directly, or indirectly through one or more interposed entities, by one or more of the following:

(i) a company covered by paragraph (a);

(ii) a *mutual insurance company;

(iii) a *mutual affiliate company;

(iv) a *publicly traded unit trust;

Company A is an unlisted public company and does not fall within the list of entities affected by section 149-50 of the ITAA 1997. Therefore, pursuant to section 149-25 of the ITAA 1997 Company A will, for the purposes of Subdivision 149-B, be treated as a non-public entity.

Section 149-30 of the ITAA 1997 provides the time at which an asset stops being a pre-CGT asset for a non-public entity. It relevantly states:

(1) The 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.

…

(2) 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.

…

Deceased estate

Special rules apply to work out majority underlying interests in an asset if an ultimate owner acquired an underlying interest in it because of the death of the former owner.

Subsections 149-30(3) and (4) of the ITAA 1997 provide that, for the purposes of Subdivision 149-B, if an ultimate owner (‘new owner’) has acquired an interest in an asset because of the death of a person (‘former owner’), the new owner is treated as having held the underlying interest of the former owner over the years.

There were several instances after the 1998 financial year where Company A shares were transferred to new owners because of the death of the former owners. Subsection 149-30(4) of the ITAA 1997 treats the new owners as having a percentage of the underlying interests in the asset equal to the lesser of the acquired percentage or the former owner’s percentage at that time.

Conclusion

For the purposes of Division 149 ITAA 1997, Company A has provided various evidence, which includes that a majority underlying interest in Company A was held by ultimate owners who in aggregate held a majority underlying interest in Company A from the start of the 1999 financial year to 31 May 2015.

The Commissioner is satisfied or thinks it reasonable to assume that as at 31 May 2015 a majority underlying interest in Company A was held by ultimate owners who also held a majority underlying interest in Company A immediately before 20 September 1985 and at all times in between those dates. Accordingly, the assets have not stopped being pre-CGT assets because of Division 149 of the ITAA 1997.

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