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Edited version of your written advice
Authorisation Number: 1051415547240
Date of advice: 25 September 2018
Ruling
Subject: Pre-CGT assets
Question 1
Will subsection 149-30(1) operate in the first instance to stop the Asset being a pre-CGT asset?
Answer
Yes
Question 2
Is the Commissioner satisfied, or does the Commissioner think it reasonable to assume, that the majority underlying interests in the Asset have been held by the same ultimate owners, the Individuals, at all times from immediately before 20 September 1985 to the disposal of the Property?
Answer
Yes
This ruling applies for the following period
Year ending 30 June 201X
The scheme commences on
1 July 201X
Relevant facts and circumstances
1. The Company is a private company that was incorporated in Australia prior to 20 September 1985.
2. The Company acquired the Asset prior to 20 September 1985.
3. Immediately before 20 September 1985 there was a mix of ordinary shares on issue to individuals (the Individuals) and A class shares on issue to private companies, through which dividends could be paid to a number of other beneficiaries.
4. The Individuals who were directors of the Company could in their absolute discretion decide whether the Company would pay dividends on ordinary or A class shares.
5. The A class shares have a right to return of the paid up capital on winding up, and no interest in the surplus net assets.
6. Details of the dividend distributions for the relevant years were provided.
7. The Asset was sold in 201X.
8. The asset has never been used for income producing purposes.
9. Dividends from the Company could ultimately only ever be (and were) received by the Individuals or their family members.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 149
Income Tax Assessment Act 1997 Subdivision 149-B
Income Tax Assessment Act 1997 Section 149-15
Income Tax Assessment Act 1997 Section 149-30
Further issues for you to consider
Anti-avoidance rules
Reasons for decision
Questions 1 and 2
Summary
1. Although in the first instance, it cannot be determined that the majority underlying interests in the asset have not changed, the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before the time of sale of the property, the majority underlying interests in the property were had by ultimate owners who had majority underlying interests in the asset immediately before that day. Therefore, the property did not stop being a pre-CGT asset for the relevant period.
Detailed reasoning
2. Division 149 discusses when an asset stops being a pre-CGT asset. Subdivision 149-B relevantly discusses when an asset of a non-public entity, such as a private company, stops being a pre-CGT asset.
3. Subsection 149-30(1) states that the asset stops being a pre-CGT asset at the earliest time when the 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.
4. Majority underlying interests (MUIs) are defined at section 149-15. MUIs consist of more than 50% of the beneficial interests that ultimate owners (in this case individuals in accordance with subsection 149-15(3)) have, whether directly or indirectly, in:
a. the asset; and
b. in any ordinary income that may be derived from the asset.
5. 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.
6. Alternatively, subsection 149-30(2) provides that subsection (1) will apply as if the majority underlying interests have not changed if the Commissioner is satisfied this is so or thinks it is reasonable to assume.
7. As the A class shares give the right only to a return of capital contributed in the case of winding up, it is the ordinary shareholders who would receive the majority of the capital distribution in this situation. Thus, immediately before and since 19 September 1985, the beneficial interests in relation to the Asset itself has remain unchanged, satisfying paragraph 149-15(1)(a) in relation to subsection 149-30(1). However, paragraph 149-15(1)(b) must also be satisfied in relation to subsection 149-30(1).
8. This presents a practical difficulty as it is impossible to determine with certainty what proportion of a dividend would be distributed ultimately through to the Individuals (due to the discretionary nature of declaring dividends to different classes of shares). Due to the discretionary nature of dividends to varying entities, and the pattern of actual distribution, it cannot be said that the beneficial interests in the income from the Asset, and therefore the majority underlying interests, were held by the Individuals. This means that subsection 149-30(1) will operate in the first instance to stop the Asset being a pre-CGT asset on 20 September 1985.
9. However, if the Commissioner is satisfied, or thinks it reasonable to assume, that the majority underlying interests have not changed, then pursuant to subsection 149-30(2), subsection (1) will apply as if the majority underlying interests have not changed.
10. In this case, the Company has been run for the sole benefit of members of the same family and the beneficial interests in the Asset have not changed by more than 50% throughout the ownership period. For the relevant periods, it was members of the Individuals that had complete discretion over where the dividends were paid. It was at their discretion that payments were made to their family members or themselves. Distributions could only be made to themselves or their family members.
11. Thus, in this case, the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before the time of sale of the Asset, the majority underlying interests in the Asset were had by ultimate owners, the Individuals, who had majority underlying interests in the Asset immediately before that day. Thus, pursuant to subsection 149-30(2), subsection (1) will apply as if there has been no change in the majority underlying interests. Therefore, the Asset did not stop being a pre-CGT asset for the relevant period.
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