Edited version of private advice

Authorisation Number: 1051747851486

Date of advice: 11 September 2020

Ruling

Subject: Capital gains tax asset

Question

With reference to section 149-25(2) ITAA 1997, is the Commissioner satisfied, or thinks it is reasonable to assume, that at all times on and after 20 September 1985 to now, that the majority underlying interests in the CGT asset (the land) were held by ultimate owners who had majority underlying interest in the land immediately before 20 September 1985?

Answer

Yes

This ruling applies for the following period:

Year Ending 30 June 2021

The scheme commences on:

Pre-20 September 1985

Relevant facts and circumstances

You as the public officer of the company advised the following:

·   The Company was incorporated on the XX X 19XX

·   That at inception the shares were held in the following manner:

-  Person A - 1 Governing Director's 'A' class shares.

-  Person B - 1 Governing Director's "B" class share.

-  Person C - 10,000 'C' class ordinary shares.

·   The Trust A was settled on the XX of X 19XX with Person A and Person B appointed as trustees of the trust.

·   Person D was issued 10,000 'C' class ordinary shares on XX of X 19XX.

·   Person A remained a shareholder from inception till his death on the XX of X 19XX. The 1 Governing Director 'A' class share that he owned converted to 1 'C' class ordinary share and was transferred to Person B.

·   The Trust A was settled on the XX of X 19XX with Person A and Person B appointed as trustees of the trust.

·   Person D was issued 10,000 'C' class ordinary shares on the XX of X 19XX.

·   Person A remained a shareholder from inception till his death on the XX of X 19XX. The 1 Governing Director 'A' class share that he owned converted to 1 'C' class ordinary share and was transferred to Person B.

·   Person B was appointed the director and the Company Secretary of Company A on the XX of X 19XX.

·   On the XX X 19XX, Person C and Person D transferred 10,000 shares that they each owned in Company A to Trust A.

·   The primary beneficiaries of Trust A were Person C and Person D.

The general beneficiaries of Trust A include:

-  Primary Beneficiaries

-  The daughters of Person A and Person B, their remoter issue

-  Any entities in which these individuals are beneficiaries

·   Person E and Person F are daughters of Person A and Person B.

·   The company owns parcels of land ('Land') that were purchased in 19XX and 19XX respectively (ie Pre-CGT).

You further advised in your application that the trust deed had amendments over the Years. The details are as follows:

X of X 19XX -The amendments included the following:

-  Successive guardians subsequent to the death of Person A and Person B

-  Primary beneficiaries to include Person E and Person F

-  The restriction of investments capable of being made by the trust

-  Trustee given additional power to deal with various types of income

-  Clarification in relation to the vesting of assets if required

Further to this X of X 19XX - the amendments included updating the respective definitions of the Guardian and Appointor in the Schedule to the Trust Deed subsequent to the death of Person A.

On X of X 19XX - The definitions of the Guardian and Appointor in the schedule to the Trust Deed were varied.

·   Person B was appointed as the sole Trustee, Guardian and Appointor after the death of Person A on the XX of September 19XX.

·   Deed of confirmation was executed by the relevant parties on the XX of X 20XX. This was to acknowledge, confirm and agree the terms of the trust and the relevant amendments were properly executed and stamped as the original executed copies could not be located.

·   We understand that Trust A did not make any distributions for the year ended XX X 20XX till the XX of X 20XX as it does not have any other income generating assets apart from the shares in Company A.

·   The Governing Directors 'B' class share entitles Person B to vote three times the number of all votes cast and also entitles Person B discretionary rights in relation to the payment of dividends.

·   The "C" class ordinary shareholders of Company A have the same rights to voting, dividends and capital.

·   The following dividends have been paid from Company A to Person B for the years ended XX of X 20XX to XX of June 20XX. There were no other dividends paid by the company prior to the FY 20XX going back to FY 19XX based on the information available to us.

Ownership

You provided the following facts in your application:

·   When Company A was incorporated in 19XX, the shares were held in the following manner:

-  Person A - 1 Governing Director's 'A' class share.

-  Person B - 1 Governing Director's B class share.

-  Person C - 10,000 'C' class ordinary shares.

·   On the XX of X 19XX, Person D was issued 10,000 'C' class ordinary shares.

·   The ultimate owners of the CGT asset i.e. Company A's shareholders as per section 149-15(3) ITAA 1997 as at 20^th of September 1985 are as follows:

Shareholder Shareholding Underlying Interest

Person A 1 Governing Director 'A' class share 0.0X%

Person B 1 Governing Director 'B' class share 0.0X%

Person C 10,000 'C' Class ordinary shares XX.XX%

Person D 10,000 'C' Class ordinary shares XX.XX%

·   There were two changes to the shareholding of Company A that took place post 20^th September 1985.These are as follows:

-  XX of X 19XX- Person C and Person D transferred their combined total of 20,000 C class ordinary shares to Trust A.

-  XX of X 19XX - upon passing, Person A Governing Director 'A' class share that he owned automatically converted to 1 'C' class ordinary share and was transferred to Person B.

·   A signed statement from the Trustee of the Trust A stating the following:

-  Person C and Person D, are primary beneficiaries of the Trust A.

-  The beneficiaries of the Trust, Person C and Person D, Person E and Person F plus

Spouses and children

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 Section 149-30

Income Tax Assessment Act 1997 Section 149-15

Reasons for decision

Division 149 of the ITAA 1997 outlines the rules which govern when an asset acquired by a taxpayer before 20 September 1985 is treated as being acquired after that date for capital gains tax (CGT) purposes.

Under subsection 149-30(1) of the ITAA 1997, a pre-CGT asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interest in the asset were not had by the ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985.

Subsection 149-15(1) of the ITAA 1997 provides that majority underlying interests in a CGT asset consists of:

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

·   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 149-30(4) of the ITAA 1997 provides that if an ultimate owner (new owner) has acquired an interest in an asset which is transferred to them as a result of the death of a person (the former owner), the new owner is treated as having held the underlying interest of the former owner over the years. Essentially the new owner will stand in the shoes of the former owners.

A beneficiary in a discretionary trust, such as the trust, could not be said to have a beneficial interest in the income or assets of the trust, in the light of cases such as Gartside v IRC [1968] AC 553 and Re Weir's Settlement MacPherson & anor v. IRC [1970] 1 All ER 297.

However, paragraphs 5 to 7 of Taxation Ruling IT 2340 discuss what happens in respect of non-fixed family trusts and the application of the former section 160ZZS of the Income Tax Assessment Act 1936 (now Division 149 of the ITAA 1997):

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 underlying 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 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. 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 in 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.'

The discretionary powers of the trustee of a discretionary (family) trust and those of the trustee of a discretionary testamentary trust are not materially different and it is reasonable to adopt the same approach to both when considering the question of majority underlying interests for purposes of Division 149 of the ITAA.

Application to your circumstances

With the facts provided, in reference to section 149-30(2) ITAA 1997 it is reasonable to assume that at all times on and after 20 September 1985 to the date of this private ruling the majority underlying interests in the CGT asset (the land) were held by ultimate owners Person C and Person D who had majority underlying interests in the land immediately before 20 September 1985.

This private ruling is made on the question as requested in your application. If there are any restructures of the Trust or future changes to the ultimate owners or the majority underlying interests in the CGT asset this ruling will have no effect and you cannot rely on it.

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