Edited version of private advice

Authorisation Number: 1051820117165

Date of advice: 7 April 2021

Ruling

Subject: Pre-CGT assets

Question

Is the Commissioner satisfied, or does the Commissioner think it is reasonable to assume that majority underling interests in the Asset have been held by the same ultimate owners, at all times from immediately before 20 September 1985 to the disposal of the asset?

Answer

Yes

Division 149 of the Income Tax Assessment Act 1997 outlines the circumstances when an asset acquired before 20 September 1985 stops being a pre-CGT asset. 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.

In this case, the ultimate owners who held majority underlying interests in the company immediately before 20 September 1985 have been retained. Even though there has been the death of some family members and one shareholder acquired further shares, there have been no new shareholders or change in the membership of the family group. That is, there has been no change in the majority underlying interest. Therefore, the Commissioner finds it is reasonable to assume that the majority underlying interest in the company has been held by the same ultimate owners at all times from immediately before 20 September 1985 to the disposal of the Asset.

Further information can be found in the Australian Taxation Office Interpretative Decision ATO ID 2011/101 Income Tax Capital Gains Tax: Division 149 majority underlying interests - no new shareholders on ato.gov.au

Question

Will CGT event K6 happen on liquidation of Entity A?

Answer

Yes.

CGT event K6 happens where another CGT event (for example CGT event C2) happens to pre-CGT shares, and there is no roll-over for the other CGT event (subsection 104-230(1) of the ITAA 1997).

CGT event K6 only happens if, just before the other CGT event happened, the market value of post-CGT property (other than trading stock) of the company or the market value of interests the company owned through interposed companies in post-CGT property is at least 75% of the net value of the company (subsection 104-230(2) of the ITAA 1997). That is, the amount by which the market value of the assets of the company exceed the sum of the market value and liabilities of the company.

Entity A holds pre-CGT and post-CGT assets which will be disposed of prior to liquidation. On liquidation of Entity A, the shares in Entity A will be either redeemed or cancelled and therefore CGT Event C2 will occur. Roll-over is not available for CGT Event C2. In the event that Entity A has converted all of its assets to cash, 0% of the net value of Entity A will be considered to be pre-CGT assets as 100% of the value of Entity A will be in cash or cash equivalents. As a result, subsection 104-230(2) is satisfied and CGT Event K6 applies. However, there will be no capital gain as the proceeds attributable to the shares will be equal to the sum of the cost bases of the Entity A's property (cash).

This ruling applies for the following period:

Year ending 30 June 20XX and/or Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Entity A is an Australian resident.

Entity A acquired an asset prior to 20 September 1985.

Shareholders of Entity A are considering entering into a member's voluntary liquidation of Entity A and returning the capital to its shareholders.

Entity A holds pre-CGT and post-CGT assets which will be disposed of prior to liquidation.

Upon liquidation, it is expected that Entity A will have only cash on hand with the value of all other assets realised prior to liquidation.

On incorporation of entity A, shares were issued.

Since then, some shares were transferred to other family members as beneficiaries of deceased estates.

One shareholder acquired further shares in entity B. Entity B has pre-CGT shares in entity A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 149-30

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 section 104-230

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