Edited version of private advice

Authorisation Number: 1051817371566

Date of advice: 25 March 2021

Ruling

Subject: CGT - majority underlying ownership

Question

Is the Commissioner satisfied, or does the Commissioner think it is reasonable to assume, that majority underlying interests in the pre-CGT shares of Coy A have been held by the same ultimate owners who had majority underlying interests in the same pre-CGT shares immediately before 20 September 1985?

Answer

Yes

This ruling applies for the following period:

Period ending X.

The scheme commences on

20 September 1985

Relevant facts and circumstances

Coy A

Coy A incorporated on X/X/XX and is the head company of the Coy A income tax consolidated group (Coy A Group) and carries on its business through its wholly owned subsidiary, Coy B.

Coy A has only ever been administered for the benefits of descendants of Person A.

The Coy A Group has several land holdings that were acquired or deemed to have been acquired before 20 September 1985.

Coy A's Constitution sets out that only descendants of Person A (or their entities) are able to be shareholders.

Immediately before 20 September 1985, Coy A had X number of ordinary shares and X number of preferred ordinary shares on issue held equally by Coy C, Coy D and Coy E and there have been no changes to the holding of ordinary shares in Coy A since immediately before 20 September 1985.

The ordinary shares hold rights to ordinary and capital income of Coy A and the right to vote.

The preferred ordinary shares hold rights to dividends subject to specific conditions as determined in Coy A's Constitution, a right to the return of capital paid on winding up of Coy A and no right to vote.

There have been no changes to the holding of the preferred ordinary shares in Coy A since 20 September 1985.

Coy A has not accrued or paid a dividend on the preferred ordinary shares since 20 September 1985.

Since 20 September 1985, X Redeemable Preference Shares (RPS) have been issued in Coy A (B, C and D Class), each carrying the same rights and conditions with not more the X% of all dividends paid to any of the RPS on issue.

On X/X/XX, following the death of Person B and pursuant to their will, the B Class RPS was transferred into the Estate of Person B and then subsequently held in Trust A.

On X/X/XX, the C Class RPS was cancelled.

On X/X/XX, the D Class RPS was cancelled.

Details of the dividends paid since X/X/XX were provided.

Coy C

Coy C was incorporated in Australia on X/X/XX and immediately before 20 September 1985 had X ordinary shares on issue held by or for the (absolute) benefit of Person E and at all times since, Person E has been the beneficial owner of all Coy C shares.

Coy E & the Estate of Peron Q

Coy E was incorporated on the X to hold Person Q's shares in Coy A.

Following the passing of Person Q on X/X/XX and in accordance with the Will of Person Q the shares were held in trust for the Estate of Person Q and beneficiaries of the Estate of Person Q.

On X/X/XX, the ordinary shares were split into X number of ordinary shares and held in the same proportions as the original shares.

There have been no variations to the terms of the Estate of Person Q and all transfers of the ordinary shares and RPS have been undertaken in accordance with the Will of Person Q.

Coy D

Coy D was incorporated on X/X/XX and immediately before 20 September 1985, Coy D had X ordinary shares and X RPS on issue.

Immediately before 20 September 1985,

•                     the ordinary shares in Coy D were held by or for the absolute benefit of Person F.

•                     the RPS were held equally by as follows by the trustee for Person I, trustee for Person J, Person K and Person L, and all have the same terms, rights and conditions.

On X/X/XX, Coy D issued an A Class RPS to Person M with an entitlement to dividends not greater than X%.

The A Class RPS share was held by Person M until their death on X/X/XX and no dividend has been paid on the A Class RPS since the X financial year end.

There have been a number of share transfers since 20 September 1985 which have occurred as the result and in accordance with the wills of the former shareholders.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 149-10

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

Income Tax Assessment Act 1997 Paragraph 149-15(1)(a)

Income Tax Assessment Act 1997 Paragraph 149-15(1)(b)

Income Tax Assessment Act 1997 Subsection 149-15(2)

Income Tax Assessment Act 1997 Subsection 149-30(1)

Income Tax Assessment Act 1997 Subsection 149-30(2)

Income Tax Assessment Act 1997 Subsection 149-30(3)

Income Tax Assessment Act 1997 Subsection 149-30(4)

Income Tax Assessment Act 1936 Subsection 160ZZS(1)

Reasons for Decision

These reasons for decision accompany the Notice of private ruling for Coy A.

All legislative references are to the ITAA 1997 unless otherwise indicated

Question

Is the Commissioner satisfied, or does the Commissioner think it is reasonable to assume, that majority underlying interests in the pre-CGT shares of Coy A have been held by the same ultimate owners who had majority underlying interests in the same pre-CGT shares immediately before 20 September 1985?

Summary

The Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 up to the date of this ruling that the majority underlying interests in the pre-CGT asset(s) were had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985.

Detailed reasoning

Section 149-10 is the rewritten form of previous subsection 160ZZS(1) of the ITAA 1936 and applies from the start of the 1998/1999 income year with former subsection 160ZZS(1) of the ITAA 1936 applicable to earlier income years.

Subsection 149-30(1) provides that an 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.

Majority underlying interests[1] 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.

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.[2]

Subsection 149-30(2) provides that 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, subsection 149-30(1) will not apply.

Subsections 149-30(3) and (4) provide that if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner 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.

Application to Coy A and its ultimate owners

Immediately before 20 September 1985, the majority underlying interests in the assets of Coy A were had equally by Coy C, Coy D and Coy E, the shares in these entities were had directly or indirectly by the descendants of Person A as the ultimate owners.

Coy A's Constitution specifies that shareholders can only be those that are direct descendants of Person A and Person R, including entities where the beneficiaries or shareholders are descendants of the Persons A and R, the Family Group.

Changes to the ultimate holders of the ordinary & preferred ordinary shares issued in Coy A

Coy E

There have been no new shares issued in Coy E and although numerous changes to trustees and transfers to beneficiaries have occurred, these have been undertaken in accordance with the Will of Person Q with all shares held by members of the Family Group. As the changes have been due to the death of Person Q (via their Will), subsections 149-30(3) and (4) would apply to treat the (new) ultimate owner as having held the underlying interests of the former owner over the years.

Coy D

Similar to Coy E, there have been a number of trustee changes for the Testamentary Trust which held the ordinary shares and RPS in Coy D on trust for the beneficiaries of the Estate of Person F with transfers to beneficiaries occurring in accordance with the Will. Therefore, pursuant to subsections 149-30(3) and (4), the ultimate owner (new owner) is treated as having held the underlying interests of the former owner over the years.

Coy C

At all times since immediately before 20 September 1985 till current, Person E has been the beneficial owner of the shares issued. Therefore, there has been no change in the majority underlying interests in Coy C since immediately before 20 September 1985 till current.

Current ultimate owners of the ordinary and preferred ordinary shares issued in Coy A

At the date of this ruling, the ordinary shares and preferred ordinary shares on issue in Coy A were had in the same proportions by the same shareholders (Coy C, Coy D and Coy E) as immediately before 20 September 1985, carrying the same rights and conditions.

As the right to receive a direct or indirect capital distribution from Coy A has remained the same at all times, immediately before 20 September 1985 and till the date of this ruling, Coy A satisfies the first requirement in paragraph 149-15(1)(a).

RPS

To satisfy the second requirement in paragraph 149-15(1)(b), the ultimate owners need to have more than 50% of the beneficial interests, directly or indirectly, in any ordinary income (that may be derived from the asset).

Since 20 September 1985 there have been X RPS issued, one in Coy D and three in Coy A.

As each RPS on issue carries a discretionary right to dividends, this must be considered in determining whether the second requirement in paragraph 149-15(1)(b) has been satisfied.

RPS issued in Coy A

For the period X/X/XX to X/X/XX, X RPS were issued in Coy A to descendants of Person A, carrying the same rights and conditions to the ordinary income of Coy A with no greater than X% of the dividends paid to the holders of the RPSs.

X RPS were cancelled with the remaining X RPS transferred to the Estate of Person B following the death of Person B and then in accordance with the Will transferred into Trust.

As more than 50% of the ordinary income paid as dividends by Coy A during a financial year was issued directly or indirectly to the same ultimate owners that had the majority underlying interests in the CGT asset(s) immediately before 20 September 1985, the requirement in paragraph 149-15(1)(b) is satisfied.

RPS issued in Coy D

The RPS issued to Person M on X/X/XX (held until Person M's death on X/X/XX), did introduce a new ultimate owner of Coy A that wasn't present immediately before 20 September 1985. However, as a descendant of Person A, Person M is part of the family group.

The shareholder policy held that Coy D would not pay a dividend on the RPS which represented more than X% of the total of all dividends paid during a financial year by Coy D.

No dividend has been paid on the RPS since the X financial year end and during the years in which a dividend was paid, no greater than X% of the ordinary income was paid on the RPS. As such, more than 50% of the dividends paid by Coy D during a financial year were issued directly or indirectly to the same ultimate owners that had the majority underlying interests in the CGT asset(s) immediately before 20 September 1985, means the requirement in paragraph 149-15(1)(b) is satisfied.

Conclusion

For the purposes of subsection 149-30(2), the Commissioner is satisfied and finds it reasonable to assume, that majority underlying interest in the pre-CGT assets of Coy A were held by the same ultimate owners who had majority underlying interests in those same pre-CGT assets immediately before 20 September 1985 to the date of this ruling.

[1] Subsection 149-15(1).

[2] Subsection 149-15(2).

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