Edited version of private advice

Authorisation Number: 1052069732654

Date of advice: 6 February 2023

Ruling

Subject: Pre-CGT status

Question

Will Subdivision 149-B of the Income Tax Assessment Act 1997 apply to deem that the pre-CGT assets of the Entity to lose their pre-CGT status?

Answer

No

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    The Entity was incorporated in XXXX.

2.    The Entity purchased a property in XXXX and is a pre-CGT asset.

3.    There have been several improvements made to the property since its original purchase, with the most recent being completed in early XXXX.

4.    Under the Rules of the Entity, any profits arising from the Entity's activities cannot be distributed to its members.

5.    Section 43 of the Associations Incorporation Act 1985 provides that it is not lawful to distribute any surplus assets to members, former members, or their associates upon winding up.

6.    The Entity has entered into discussions with a developer which will involve the disposal of part of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 108-5(1)

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 Subdivision 149-B

Income Tax Assessment Act 1997 Section 149-10

Income Tax Assessment Act 1997 Section 149-15

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

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

Income Tax Assessment Act 1997 Subsection 149-15(3)

Income Tax Assessment Act 1997 Paragraph 149-15(3)(b)

Income Tax Assessment Act 199 Section 149-30

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

All references made in these reasons for decision are to the Income Tax Assessment Act 1997 unless otherwise stated.

Division 149 of the ITAA 1997 prevents assets being treated as pre-CGT assets if there is a change in their majority underlying ownership. Subdivision 149-B of the ITAA 1997 determines when a pre-CGT asset will be taken to be acquired after 19 September 1985 for an asset of a non-public entity.

A CGT asset is defined in subsection 108-5(1) of the ITAA 1997 as any kind of property or a legal or equitable right that is not property. A CGT asset is a pre-CGT asset if it was last acquired before 20 September 1985 and no income tax provision has operated to treat it as having been acquired after that date.

Section 149-10 of the ITAA 1997 provides what is a pre-CGT asset as follows:

A CGT asset that an entity owns is a pre-CGT asset if, and only if:

(a) the entity last acquired the asset before 20 September 1985; and

(b) the entity was not, immediately before the start of the 1998-99 income year, taken under:

(i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936; or

(ii) Subdivision C of Division 20 of former Part IIIA of that Act;

to have acquired the asset on or after 20 September 1985; and

(c) the asset has not stopped being a pre-CGT asset of the entity because of this Division.

Section 149-30 of the ITAA 1997 provides that an asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. This means that ultimate owners who held underlying interests in an asset immediately before 20 Septembers 1985 must retain those interests after that date otherwise Division 149 of the ITAA 1997 will operate to convert the asset into a post-CGT asset.

Majority underlying interests (MUI) are defined in section 149-15 of the ITAA 1997. MUIs consist of more than 50% of the beneficial interests that ultimate owners have, whether directly or indirectly, in:

a) the CGT asset; and

b) in any ordinary income that may be derived from the asset.

To determine if the majority underlying interests in a CGT asset have been maintained the identity of the ultimate owners must be determined.

The term 'ultimate owner' is central to the operation of Division 149 and is defined to mean an entity listed in subsection 149-15(3). Relevantly, paragraph 149-15(3)(b) provides that a company whose constitution prevents it from making any distribution to its members whether in money, property or otherwise, is an "ultimate owner" for the purposes of Division 149.

A company's 'constitution' is defined in section 995-1 as its memorandum and articles of association, or any other rules or document constituting the company or governing its activities.

The Associations Incorporation Act 1985 in South Australia (AIA 1985) provides rules that govern incorporated associations and therefore falls within the definition of a company's constitution and must be read in conjunction with the entity's other governing documents. Section 43 of the AIA 1985 makes it unlawful to distribute any surplus assets to members, former members, or their associates upon winding up.

Determining whether a company meets the definition of ultimate owner at a particular time therefore requires a careful examination of its constitution. In particular, it is necessary to consider the entitlements of members to share in any income or capital of the company if a distribution were made at that time.

Application to your circumstances

The Rules of the Entity prevents any profits arising from the Entity's activities to be distributed to its members. Further, the AIA 1985 provides rules that govern incorporated associations including section 43, which makes it unlawful to distribute any surplus assets to members, former members, or their associates upon winding up.

As the Rules, together with the operation of section 43 of the AIA 1985, prevent the entity from making any distributions to its members, the entity is an ultimate owner within the definition in paragraph 149-15(3)(b) of the ITAA 1997.

As the assets have always been owned by the Entity, and it has an entitlement to more than 50% of the beneficial interest in the income and capital that may be derived from the assets, the majority underlying interest test in subsection 149-15(1) of the ITAA 1997 is satisfied by the entity.

As such, Division 149 does not prevent the assets being treated as pre-CGT assets, so the pre-CGT status of the assets of the Entity will not be affected by Subdivision 149- B of the ITAA as there is no change in the majority underlying ownership.

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