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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1051383990482

Date of advice: 12 June 2018

Ruling

Subject: Capital gains tax

Question 1

Will CGT event K6 happen when the property is sold?

Answer

No.

Question 2

Does Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to treat the property as a post-CGT asset?

Answer

No.

Question 3

If the building is sold, will the capital gain be disregarded under paragraph 104-10(5) of the ITAA 1997?

Answer

Yes.

Question 4

If the land is sold (where the building is demolished), will the capital gain be disregarded under paragraph 104-10(5) of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

The scheme commenced on

1 July 2017

Relevant facts and circumstances

You (the trust) are a discretionary trust.

The beneficiaries of the trust as set out in the trust deed are a A and B and their children.

The trust has at all times since its existence distributed the income/capital of the trust fund to the abovenamed beneficiaries.

There has been no amendment to the trust deed that alters the underlying interests or appoints any new beneficiaries.

The trust acquired a commercial building before 20 September 1985.

The property is held by the trust on capital account.

The property has been rented out for the majority of its ownership period.

The trust is in the process of selling the property.

The trust may also consider demolishing the building and selling the land.

When the trust acquired the property it consisted of the current building and the underlying land. Since the ownership of the property commenced there has been no substantial capital improvements made.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 149-B

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 section 104-230

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

Income Tax Assessment Act 1997 section 149-30

Reasons for decision

Question 1

Section 104-230 of the ITAA 1997 deals with the disposal of shares in a company or interests in a trust acquired before 20 September 1985. It states CGT event K6 will occur if:

If you meet conditions a), b) and c) and, either or both tests described at i) and ii) above, then CGT event K6 will occur.

In your case, you are not disposing of shares in a company or an interest in a trust. Therefore CGT event K6 will not occur when you dispose of the property.

Question 2

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 expression ‘beneficial interests’ as used in the definition of majority underlying interests is not defined.

Taxation Ruling IT 2340 reflects an approach of determining which natural persons hold the beneficial interests. Where assets are held by the trustee of a discretionary trust, the assets are not beneficially owned by any persons. This creates difficulties when assessing whether the majority underlying beneficial interest in an asset is maintained.

In this regard, paragraphs 6 and 7 of IT 2340 make it clear that if a trustee continues to administer a trust for the benefit of members of a particular family, section 160ZZS of the ITAA 1936 (Subdivision 149-B of ITAA 1997) will not apply. The ruling explains that if there is an amendment to the trust deed which results in a practical effect of a change of more than 50% of the underlying interests of the trust assets, then subsection 160ZZS(1) (Subdivision 149-B of ITAA 1997) would apply. The ruling also states that in considering whether majority underlying interests have been maintained in the assets of a trust it will be relevant to take into account the way in which the discretionary powers of the trustee have been exercised.

Application to your circumstances

Having regard to IT 2340, it is considered that the majority underlying interests in the property held by the trust have not changed. Consequently Division 149 of the ITAA 1997 would not operate to remove the pre-CGT status of the property held by trust.

Accordingly, the property held in the trust will not stop being a pre-CGT asset under section 149-30 of the ITAA 1997.

Questions 3&4

Section 104-10 of the ITAA 1997 provides that capital gains tax (CGT) event A1 occurs when your ownership in a CGT asset is transferred to another entity.

Subsection 104-10(5) of the ITAA 1997 provides that a capital gain or capital loss will be disregarded if the asset was acquired before 20 September 1985.

As you acquired the property before 20 September 1985 and Division 149 does not apply the capital gain that arises when the property (with or without the building) is sold will be disregarded.


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