Edited version of private advice

Authorisation Number: 1052106888660

Date of advice: 19 April 2023

Ruling

Subject: CGT - shares

Question 1

Have the shares in the Company that individuals B, C and D inherited from individual A transitioned their status from pre-CGT to post-CGT on the date they inherited them?

Answer

Yes.

Question 2

Following individual A's death, will the shares in the Company that the Shareholders already held before 20 September 1985, retain their pre-CGT status for the purposes of Part 3-1 for the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

Following the death of individual A, have the pre-CGT assets of the Company stopped being pre-CGT assets as a result of the application of subsection 149-30(1) of the ITAA 1997?

Answer

No.

Question 4

At the time of individual A's death, was the market value of the Company shares $X?

Answer

Yes.

Question 5

Will the sale by the Shareholders of the shares in the Company they held (before individual A's death) to a purchaser result in CGT event K6 happening pursuant to section 104-230 of the ITAA 1997?

Answer

No.

This private ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Company was registered in YYYY.

On DD MM YYYY individual A and their former spouse were each allotted with X ordinary share.

In YYYY the Superannuation Fund (the Fund) was allotted with X ordinary share.

In YYYY individual B and C were each allotted with X ordinary share.

In YYYY individual A, their spouse and the Fund were each allotted with an additional X ordinary shares. On the same day, individual B and C were each allotted with an additional X ordinary shares.

In YYYY individual D was allotted X ordinary shares.

Immediately before 20 September 1985, the shareholding in the Company was as follows:

Pursuant to an order of the Family Court, individual A's spouse transferred all their shares in the Company to individual A.

The shareholding between 20 September 1985 and individual A's death was as follows:

In the YYYY financial year individual A passed away.

Individual's B, C and D were bequeathed individual A's shares in the Company equally.

The shareholding of the Company at the time of this ruling application is below:

At the time of individual A's death, the assets of the Company included a large rural property and a residential duplex.

Prior to 20 September 1985, the Company purchased a large rural property (the Property) comprised of X separate lots.

X were acquired by the Company prior to 20 September 1985. X was purchased by the Company in YYYY and is worth approximately X per cent of the estimated total property market value.

From YYYY the Property has been used by the Company to carry on a primary production business.

In the YYYY financial year the Shareholders entered into a new Call Option Deed with a third party. The agreed sale price of the shares in the Company in this new Call Option Deed was $X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-230

Income Tax Assessment Act 1997 subsection 104-230(1)

Income Tax Assessment Act 1997 subsection 104-230(2)

Income Tax Assessment Act 1997 section 109-10

Income Tax Assessment Act 1997 Division 128

Income Tax Assessment Act 1997 subsection 128-15(2)

Income Tax Assessment Act 1997 section 128-20

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 subdivision 149-B

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

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

Reasons for decision

Question 1

Summary

The pre-CGT shares inherited from the deceased are taken to have been acquired at date of death and are therefore post-CGT assets.

Detailed reasoning

Division 128 of the ITAA 1997 deals with the effect of death. Subsection 128-15(2) of the ITAA 1997 explains that a beneficiary is taken to have acquired the asset on the day the deceased died. Section 128-20 of the ITAA 1997 set out that a CGT asset passes to a beneficiary of an estate if the beneficiary becomes the owner of the asset under a will.

If the deceased acquired the asset before 20 September 1985, it was a pre-CGT asset while they owned it. The first element of the beneficiary's cost base - the acquisition cost - is the market value of the asset on the day the deceased died.

In this case individual's B, C and D inherited pre-CGT shares from individual A. Under Division 128 of the ITAA 1997 the shares are taken to have been acquired for market value at date of death and are therefore post-CGT assets.

Question 2

Summary

The individual shareholders acquired their respective shares in the Company before 20 September 1985 for the purposes of Part 3-1 of the ITAA 1997.

The Fund did not acquire its shares in the Company before 20 September 1985 for the purposes of Part 3-1 of the ITAA 1997.

Detailed reasoning

Unless shares in a company are issued or allotted to you under a contract, the shares are acquired at the time they were issued or allotted to you (item 2 of the table in section 109-10 of the ITAA 1997).

All of individual B, C and D's shares (aside from those inherited from individual A's estate) were allotted before 20 September 1985 and therefore acquired before that date for the purposes of Part 3-1 of the ITAA 1997.

Section 295-90 provides that a CGT asset owned by a trustee or former trustee of a complying superannuation fund before 30 June 1988 is deemed to have been acquired by the trustee on 30 June 1988 for the purposes of Part 3-1 and Part 3-3 of the ITAA 1997.

Therefore, for the purposes of Part 3-1, the Fund is not considered to have acquired its shares in the Company before 20 September 1985

Question 3

Summary

The Commissioner accepts there has been no change in the majority underlying interests in the Company therefore the pre-CGT assets of the company will retain their pre-CGT status.

Detailed reasoning

Division 149 of the ITAA 1997 discusses when an asset stops being a pre-CGT asset. Subdivision 149-B of the ITAA 1997 relevantly discusses when an asset of a non-public entity, such as a private company, stops being a pre-CGT asset.

Subsection 149-30(1) of the ITAA 1997 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.

Majority underlying interests are defined at section 149-15 of the ITAA 1997. Majority underlying interests that consist of more than 50% of the beneficial interests that ultimate owners (in this case individuals in accordance with subsection 149-15(3) of the ITAA 1997) have, whether directly or indirectly, in:

a)            the asset; and

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

Subsection 149-30(1) of the ITAA 1997 will also not apply, if the Commissioner is satisfied, or thinks it is reasonable to assume that the majority underlying interests have not changed (subsection 149-30(2) of the ITAA 1997).

The transfer of underlying ownership interest in a pre-CGT asset as a result of a former owner's death or marriage breakdown is ignored for the purposes of subdivision 149-B of the ITAA 1997 (subsections 149-30(3) and (4) of the ITAA 1997).

In this case, the only changes to shareholdings were due to a marriage breakdown and the death of a shareholder. Therefore, there has not been a change in the majority underlying interest since 20 September 1985 for the purposes of Division 149 of the ITAA 1997. Therefore the pre-CGT assets of the company will retain their pre-CGT status.

Question 4

Summary

We accept that based on the information provided the market value of the Company shares was $X at the time of individual A's death.

Detailed reasoning

As discussed in question 1, the beneficiaries of individual A's estate acquired individual A's pre-CGT shares for market value as at individual A's date of death.

We accept that based on the information provided the market value of the Company shares was $X at the time of individual A's death.

Question 5

Summary

The sale by the individual shareholders of their respective shares in the Company to a purchaser will not result in CGT event K6 happening pursuant to section 104-230 of the ITAA 1997.

Detailed reasoning

Under subsection 104-230(1) of the ITAA 1997, CGT event K6 happens if you own shares in a company that were acquired before 20 September 1985 (pre-CGT shares), a CGT event happens in relation to the shares, there is no roll-over for the other CGT event and the requirement in subsection (2) is satisfied. The time of the CGT event K6 is when the other CGT event happens.

Subsection 104-230(2) of the ITAA 1997 requires that the market value of property of the company (that is not trading stock) that was acquired on or after 20 September 1985 (post-CGT property) be at least 75% of the net value of the company.

As the Individual Shareholders own pre-CGT shares in the company, CGT event A1 will happen when the shares are sold, and there is no roll-over for the event, the requirement in subsection 104-230(2) of the ITAA 1997 must be considered to determine if CGT event K6 will happen.

As the Individual Shareholders own pre-CGT shares in the company, CGT event A1 will happen when the shares are sold, and there is no roll-over for the event, the requirement in subsection 104-230(2) of the ITAA 1997 must be considered to determine if CGT event K6 will happen.

At the time the Individual Shareholders sell their shares and CGT event A1 happens, we consider the market value of the post CGT property held by the company will be less than the X% required by subsection 104-230(2). Therefore CGT event K6 will not happen when the Individual Shareholders sell their respective pre-CGT shares in the Company.

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