Edited version of private advice

Authorisation Number: 1052124800402

Date of advice: 8 June 2023

Ruling

Subject: Division 149 - majority underlying ownership

Question 1

Pursuant to subsection 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997), and notwithstanding the operation of paragraph 149-15(1)(b) of the ITAA 1997, is the Commissioner satisfied, or does the Commissioner think it reasonable to assume, that the majority underlying interests in the assets of the company have been held by the same ultimate owners, at all times from immediately before 20 September 1985 to the disposal of the land?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

Company Pty Ltd (the company) is a private company incorporated in the 1960s. It sold real property in the 2023 financial year.

The shareholders from date of incorporation to the date of sale included Father; Mother; their five children A, B, C, D and E; and one Employee. A nominal amount of shares were issued to Employee in the 1970s.

The shares issued to Employee in the 19XXs were unclassified and did not have voting rights attached to them. Notwithstanding that these shares have been reported as ordinary shares by the Australian Securities and Investments Commission (ASIC) from 1987 onwards, there was no intention to give Employee voting rights, which were originally limited to Father and Mother. Employee never voted and never received a dividend.

Dividends are usually paid to the children in equal proportions, except for when extra payments were made to A and C for the purposes of them making personal superannuation contributions. Dividends paid to Mother have generally been paid at the same rate as the dividends to the children, although the amount per share has differed to that of the children, with the difference reflecting Mother's long connection with the company.

The company has multiple share classes with the following rights:

•         A class: voting rights, but no dividend or capital rights

•         B, C, D, E, F, G class: no voting rights, but rights to dividend and capital

The company had the following members on 20 September 1985:

Table 1: Company had the following members on 20 September 1985

On 20 September 1985, A, B, C and Mother collectively held 66% of the company and its underlying assets.

There were further changes to shareholdings in the company between 20 September 1985 and the date of disposal of the land in the 2023 financial year:

The company had the following members at the date of sale in the 2023 financial year:

Table 2: Company had the following members at the date of sale in the 2023 financial year

On the disposal date, A, B, C and Mother collectively held 89% of the company and its underlying assets.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

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

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

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)

Reasons for decision

Subsection 149-15(1) provides that the majority underlying interests 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.

The discretionary nature of declaring dividends, and the different classes of shares in the company on issue to different shareholders including individuals and discretionary trusts, presents a practical difficulty as it is impossible to determine with certainty what proportion of a dividend would be distributed ultimately through to the individuals.

Because it is difficult to determine that the beneficial interests in ordinary income from the asset were held by the same individuals at the relevant times, it cannot definitively be said that paragraph 149-15(1)(b) is satisfied.

However, subsection 149-30(2) of the ITAA 1997 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, subsections (1) and (1A) apply as if that were in fact the case.

Subsections 149-30(3) and (4) of the ITAA 1997 provide that if an ultimate owner (the new owner) has acquired an interest in an asset because it was transferred to the new owner because 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 relevant period.

In this case, the company has been incorporated and run for the benefit of members of the same family. A, B, C and Mother have collectively held more than 50% of the company's shares from 20 September 1985 up to the sale of the land in the 2023 financial year; therefore, they have collectively held more than 50% of the beneficial interests in the assets of the company during that period.

Pursuant to subsection 149-30(2) of the ITAA 1997, the Commissioner is satisfied, or thinks it reasonable to assume, that the majority underlying interests in the land have been held by the same ultimate owners, at all times from immediately before 20 September 1985 to the date of disposal of the land.

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