Edited version of your written advice

Authorisation Number: 1051276045263

Date of advice: 1 September 2017

Ruling

Subject: Pre-CGT assets

Question 1

For the purposes of section 149-30, do the ultimate owners that had majority underlying interests in the pre-CGT assets of the X Group immediately before 20 September 1985 continue to have majority underlying interests in the pre-CGT assets at the date of this ruling?

Answer

Yes

Question 2

If the answer to Question 1 is ‘No’, is the Commissioner satisfied or does the Commissioner think it is reasonable to assume, that at all times on or after 20 September 1985 and before the date of this ruling application, the majority underyling interests in the pre-CGT assets were had by ultimate owners who had majority underlying interests in the pre-CGT assets immediately before that day?

Answer

N/A

This ruling applies for the following periods:

The year ended 30 June 2018

The scheme commences on:

The scheme has already commenced.

Relevant facts and circumstances

Definitions

In this Ruling:

Reference to ‘the ABC family’ in this Ruling is a reference to Individual A, Individual B, Individual C, Individual D and Individual E collectively.

Reference to ‘the X Group’ in this Ruling is a reference to the following entities:

● X Pty Limited (‘X’);

● Y Pty Limited (‘Y’);

● Z Pty Limited (‘Z’); and

● AA Pty Ltd (‘AA’)

collectively.

Reference to ‘Pre-CGT Assets’ in this Ruling is a reference to the assets owned by the X Group within the meaning of section 149-10 of the ITAA 1997.

X

X was incorporated before 1985. From just before 20 September 1985 to the date of this ruling, the following classes of shares, and the shareholders to whom they were issued, have been as follows:

● class “A” preference shares held by Individual A;

● class “B” preference shares held by Individual B;

● class “C” preference shares held by Individual C;

● class “D” preference shares held by Individual D; and

● class “E” preference shares held by Individual E.

Rights to income distributions are at the discretion of the directors of the company pursuant to the terms of X’s Memorandum and Articles of Association. However, in practice, income distributions have been at the discretion of Individual A.

In the event of the winding-up of the company, the Memorandum and Articles of Association of X provide for the distribution of company assets to members in proportion to paid-up capital on the shares held by them respectively

In addition to the assets acquired before 20 September 1985 held directly by X, X also indirectly holds assets acquired before 20 September 1985 through the following wholly owned subsidiaries:

● Y;

● J.J ABC; and

● AA.

Y

Ordinary shares

Currently, Y has ordinary shares on issue. From just before 20 September 1985 to the date of this Ruling, X held all the ordinary shares on issue.

From between just before 20 September 1985 and the date of this ruling, the rights of ordinary shares have been:

● income distributions;

● the right to vote; and

● rights to distributions of assets of the company in the event of the company's winding up, as determined by the liquidator subject to confirmation by special resolution.

Class A preference shares

As at the date of this Ruling, Y has one “A” class preference share on issue. From just before 20 September 1985 to (date), Individual A held the class “A” share in Y. Thereafter to the date of this Ruling, X held the class “A” share in Y.

From between just before 20 September 1985 and the date of this ruling the “A” class preference share has carried:

● the right, in priority to any dividend payable on any other class of shares, to fixed preference dividends of x% per annum on the paid up capital;

● the right to a return of capital in the event of the company's winding up, limited to the amount of capital paid up, in preference to all other shares; and

● no right to vote at general meetings.

Class D preference shares

Y issued a number of “D” class preference shares to Individual A which were later redeemed in full.

The “D” class preference shares:

● carried the right to vote at general meetings;

● carried the right to income distributions;

● carried the right to a return of capital in the event of the company's winding up limited to the amount of capital paid up.

Z

Ordinary shares

The details of all shareholdings in Z from just before 20 September 1985 to the date of this Ruling are as follows: [details]

Individual F and ABC Enterprises are the only shareholders outside what is defined in this Ruling as ‘the ABC family’, and from just before 20 September 1985 to a date before the date of this Ruling they have held a minority of the ordinary shares in Z. Between just before 20 September 1985 and (date), Individual F owned a minor percentage of the single class of ordinary shares in Z. Thereafter and until (date), they held an even smaller percentage of these shares. After (date), no non-family shareholders held any shares in the company.

(Note also that in respect of ABC Enterprises:

● between just before 20 September 1985 and (date), the majority of the ordinary shares in Smith Enterprises were owned directly by various members of the ABC family and X; while a minority were held by non-family shareholders, being Individual F and Individual G;

● in (year) and (year), the vast majority of the ordinary shares in ABC Enterprises were owned by the various members of the ABC family and X; while a small minority was held by a non-family shareholder (being Individual G); and

● from (date) to the date of this Ruling, all ordinary shares were held by various members of the Smith family and X. )

Between just before 20 September 1985 and (date), the ABC family owned the majority of the ordinary shares in Z. This percentage comprises direct ownership by various members of the ABC family, as well as indirect ownership by all members of the ABC family through their holdings in X, Y, and ABC Enterprises.

Thereafter and to the date of this ruling, the ABC family owned 100% of the single class of ordinary shares in the company through their ownership of X.

Between just before 20 September 1985 and the date of this Ruling, ordinary shares have carried the following rights:

● Rights to income and capital in proportion to capital paid by the shareholder. However, in practice all dividends were paid in proportion to the number of shares held by the shareholder in the company. Dividends may be declared by the company and may be made by way of an in specie distribution of assets.

● Rights to distributions of assets in the event of the company's winding up, as determined by the liquidator and subject to special resolution of the company.

Redeemable preference shares

Currently, Z has redeemable preference shares on issue.

Z had no preference shares on issue between just before 20 September 1985 to (date). On (date), a number of preference shares were issued by Z to X.

The redeemable preference shares carry the following characteristics:

● They rank in priority to all other shares to receive a repayment of the amount paid up on a winding up, but do not otherwise confer rights to distributions on winding up.

● They carry 110% of the dividend rights of the holders of ordinary shares and carry the same rights as the holders of ordinary shares to vote at general meetings.

All shares

In respect of all shares issued by Z, from 20 September 1985 to the date of this ruling, at no point during this period were distributions of income made in a manner other than that which is proportionate to the number of shares held by a shareholder.

AA

Currently, AA has ordinary shares on issue.

Between just before 20 September 1985 and (date), the combination of various members of the ABC family and X held the majority of the ordinary shares in AA. During this time, only one non-family shareholder (Individual F) held a small minority of the ordinary shares in AA.

Thereafter and to the date of this ruling, the combination of various members of the ABC family and X have held 100% of the ordinary shares in AA.

Between just before 20 September 1985 and the date of this Ruling:

● Only one class of shares was on issue, being ordinary shares. All the shares were issued at $x each.

● The rights of shareholders to income distributions are in proportion to capital paid by the shareholder. Dividends may be declared by the company and may be made by way of an in specie distribution of assets.

● The shares carry the right to vote and the rights to distributions of assets in the event of the company's winding up, as determined by the liquidator, subject to confirmation by special resolution.

● No discretion was available for the distribution of income in a manner other than that which is proportionate to capital paid by a shareholder.

● At no point during this period were distributions of income made in a manner other than that which is proportionate to capital paid by a shareholder.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997)

Section 149-15

Section 149-30

ATO view documents

Law Administration Practice Statement PS LA 2005/21

Taxation Ruling IT 2530

ATO Interpretative Decision ATO ID 2011/101

ATO Interpretative Decision ATO ID 2011/107

Reasons for decision

Question 1

For the purposes of section 149-30, do the ultimate owners that had majority underlying interests in the pre-CGT assets of the X Group immediately before 20 September 1985 continue to have majority underlying interests in the pre-CGT assets at the date of this ruling?

Summary

For the purposes of section 149-30, the ultimate owners that had majority underlying interests in the pre-CGT assets of the X Group immediately before 20 September 1985 continue to have majority underlying interests in the pre-CGT assets at the date of this ruling.

Detailed reasoning

General

Section 149-30 provides as follows:

149-30(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.

149-30(1A)

Also, Part 3-1 and this Part (except this Division) apply to the asset as if the entity had acquired it at that earliest time.

149-30(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…..

‘Majority underlying interests’ is defined under section 149-15 as follows:

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.

Dividends are ordinary income: section 6-5. The question raised in the present ruling request, is whether the ultimate owners that had majority underlying interests in the ‘pre-CGT assets of the X Group’ immediately before 20 September 1985 continue to have majority underlying interests in the pre-CGT assets at the date of this ruling.

A ‘pre-CGT asset’ is, broadly speaking, a CGT asset acquired before 20 September 1985: section 149-10.

The X Group comprises X, Y, Z, and AA. Therefore, in this case the ‘pre-CGT assets of the X Group’ are the following assets:

● Pre-CGT assets of X;

● Pre-CGT assets of Y;

● Pre-CGT assets of Z; and

● Pre-CGT assets of AA.

The ‘ultimate owners’ who have a direct or indirect beneficial interest in those assets may include individuals (subsection 149-15(3)) and are examined below. The following considers the ownership of underlying interests in pre-CGT assets of each of the entities listed above from the time commencing immediately before 20 September 1985 to the date of this ruling.

X

Shares in X have, from just before 20 September 1985 to the date of this ruling, been owned entirely by the ABC family.

The facts indicate that since just before 20 September 1985, the ABC family has had all the underlying interests in any pre-CGT assets directly owned by X over this period. Specifically, the ABC family has had a 100% direct beneficial interest in any pre-CGT assets directly owned by X; and a 100% direct beneficial interest in any ordinary income that may be derived from them. This takes into account the following:

● The Memorandum and Articles of Association of X provide for the distribution of company assets to members in proportion to paid-up capital on the shares held by them respectively in the event of the winding-up of the company.

● The Memorandum and Articles of Association also allow for the distribution of dividends to X’s shareholders.

Therefore prima facie the requirements of subsections 149-15(4) and 149-15(5) are met in respect of the individual members that comprise the ABC family, being the only ‘ultimate owners’ of the pre-CGT assets through their direct beneficial ownership of the assets.

It is acknowledged that rights to income distributions are at the discretion of the directors, who may discriminate between classes of shares (and therefore the individual shareholders in this case). However, the change in proportions in which ultimate owners hold underlying interests in an asset is immaterial where the combined owned majority underlying interests are the same: see IT 2530, and ATO ID 2011/101.

ATO ID 2011/101 provides that, if there is no new shareholder in a company after 20 September 1985, then, notwithstanding that issued shares in a company may carry discretionary rights as to dividends:

As there has been no change in the membership of that group, there has been no change in majority underlying interest. Accordingly, the Commissioner finds it reasonable to assume that majority underlying interests have been held at all times by the same ultimate owners who held such interests immediately before 20 September 1985.

Therefore the ultimate owners who held sole underlying interests in the pre-CGT assets directly owned by X immediately before 20 September 1985 is taken to have continued to do so at the date of this ruling.

Y

Just before 20 September 1985 to the date of this Ruling, the ABC family has held all the underlying interests in the pre-CGT assets owned by Y, both directly (in the case of Individual A in respect of the Class A and Class D preference shares) and through their ownership of X. Specifically in the context of section 149-15, the ABC family has had 100% of the beneficial interest in the pre-CGT assets owned by Y and a 100% beneficial interest in any ordinary income that may be derived from them. This is based on the following considerations:

● From just before 20 September 1985 to the date of this Ruling, X held all the ordinary shares on issue.

From just before 20 September 1985 to the date of this Ruling, either X or Individual A have held all the Class A preference shares on issue.

Class D preference shares were issued to Individual A on (date) which were later redeemed in full on (date).

● In respect of the ABC family’s indirect beneficial interest in Y’s pre-CGT assets held through X, subsection 149-15(4) provides:

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) provides:

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.

● All ordinary shares carry:

● the right to the distribution of dividends to shareholders, including the in-specie distribution of particular assets owned by the company; and

● the right to the assets of the company in the event of the company's winding up.

● Any capital asset or income derived from a capital asset distributed to X as a shareholder of Y would, if further distributed by X, be received by one or more members of the ABC family, each of whom, together with the other members of the family, had 100% ownership of X just before 20 September 1985 to the date of this Ruling.

Consequently the requirements of subsections 149-15(4) and 149-15(5) are met in respect of the individual members that comprise the ABC family, as ‘ultimate owners’ of the indirect beneficial interests in the CGT assets in Y.

● In respect of the Class A and Class D preference shares held by Individual A during the relevant times within the period just before 20 September 1985 to the date of this Ruling:

● it is recognised that Individual A is a member of the ABC family; and,

● consistently with the principle that the change in proportions in which ultimate owners hold underlying interests in an asset is immaterial where the combined owned majority underlying interests are the same,

any greater distribution to Individual A as a result of their ownership of the Class D preference shares does not affect the finding that there has been no change in the underlying interests held by the ABC family in Y’s pre-CGT assets.

In light of the above considerations, the pre-CGT assets of Y have always been owned by the ABC family since just before 20 September 1985.

Z

The facts indicate that since just before 20 September 1985 to the date of this Ruling, the ABC family has held the ‘majority underlying interests’ in the pre-CGT assets owned by Z. This view takes into consideration the following:

● Ordinary shares

Between just before 20 September 1985 and (date), the ABC family owned the majority of the ordinary shares in Z. This percentage comprises direct ownership by various members of the ABC family, as well as indirect ownership by all members of the ABC family through their holdings in X, Y, and ABC Enterprises.

Thereafter and to the date of this ruling, the ABC family owned 100% of the single class of ordinary shares in the company through their ownership of X.

Between just before 20 September 1985 and (date), Individual F (a non-family shareholder) owned a minor percentage of the single class of ordinary shares in Z. Thereafter and until (date), they held an even smaller percentage of these shares. After (date), no non-family shareholders held any shares in the company.

Redeemable preference shares

Z had no preference shares on issue between just before 20 September 1985 to (date). On (date), a number of preference shares were issued by Z to X, which continues to hold these shares.

● All shares carry rights to income and capital in proportion to capital paid by the shareholder. However, in practice all dividends were paid in proportion to the number of shares held by the shareholder.

● In respect of the distributions of income and capital:

● Dividends may be declared by the company and may be made by way of an in specie distribution of assets.

● Ordinary shares carry the rights to distributions of assets in the event of the company's winding up, as determined by the liquidator and subject to special resolution of the company; while redeemable preference shares carry the right to receive a repayment of the amount paid up on a winding up.

● The ABC family’s beneficial interest in the assets arises by way of:

● direct ownership of ordinary shares by some of the members of the family in Z; and

● indirect ownership of assets through X, Y and ABC Enterprises.

In respect of beneficial interests held indirectly through X, it is noted that any capital asset or income derived from a capital asset distributed to X as a shareholder of Z would, if further distributed by X, be received by one or more members of the ABC family, each of whom - together with the other members of the family - had 100% ownership of X at all points in time just before 20 September 1985.

In respect of indirect ownership held through Y and ABC Enterprises, any capital asset or income derived from a capital asset distributed to Y and ABC Enterprises as shareholders of Z would, if further distributed by Y and ABC Enterprises, be ultimately received by one or more members of the ABC family, either as direct shareholders in these entities or indirectly through X’s shareholding in these entities.

The distributions of income and capital by Z are not discretionary to the extent that in respect of all shares issued by Z, from 20 September 1985 to the date of this ruling

at no point during this period were distributions of income made in a manner other than that which is proportionate to the number of shares held by the shareholder.

Therefore at no point in time was a distribution made that would attract the application of ATO ID 2011/107, which concerns distributions by companies in which shares carry a discretionary right to dividends as between shareholders. For example, no distribution was made, or could have been made, in favour of one or more non-family shareholders to the exclusion of the ABC family members contrary to the requirement that payment be made in proportion to capital contributions.

AA

Since just before 20 September 1985 to the date of this Ruling, the ABC family has held the ‘majority underlying interests’ in the pre-CGT assets owned by AA. This is based on the following considerations:

● Between just before 20 September 1985 and (date), the combination of various members of the ABC family and X held the majority of the ordinary shares in AA. During this time, only one non-family shareholder (Individual F) held a small minority of the ordinary shares in AA.

● Thereafter and to the date of this ruling, the combination of various members of the ABC family and X have held 100% of the ordinary shares in AA.

● A ‘beneficial interest’ in the assets exists as a result of the fact that the shares in AA carry rights to income and capital in proportion to capital paid by the shareholder. Specifically:

● the shares carry the right to dividends which may be made by way of an in specie distribution of assets; and

● the shares carry the rights to distributions of capital in the event of the company's winding up, as determined by the liquidator and subject to confirmation by special resolution of the company.

● The ABC family has acquired such a beneficial interest:

● directly (in respect of the members of the ABC family who held shares directly in AA); and

● indirectly, as ‘ultimate owners’ through the family’s ownership of X. In this regard, it is noted that any capital asset or income derived from a capital asset distributed to X as a shareholder of AA would, if further distributed by X, be received by one or more members of the ABC family, each of whom - together with the other members of the family - had 100% ownership of X at all points in time just before 20 September 1985.

● The distributions of income and capital by AA are not discretionary to the extent that in respect of all shares issued by AA, from 20 September 1985 to the date of this ruling:

● no discretion was available for the distribution of income in a manner other than that which is proportionate to capital paid by a shareholder; and

● at no point during this period were distributions of income made in a manner other than that which is proportionate to capital paid by a shareholder.

Therefore at no point in time was a distribution made that would attract the application of ATO ID 2011/107, which concerns distributions by companies in which shares carry a discretionary right to dividends as between shareholders. For example, no distribution was made, or could have been made, in favour of one or more non-family shareholders to the exclusion of the ABC family members contrary to the requirement that payment be made in proportion to capital contributions.

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