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Ruling
Subject: Capital gains tax - majority underlying interest
Question 1
Do pre-CGT assets owned by the taxpayer retain their pre-CGT status pursuant to Division 149 of Income Tax Assessment Act 1997 (ITAA 1997)?
Advice/Answers
Yes.
This ruling applies for the following period
Year ending 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
The taxpayer was established some time ago. There is not an active market in the company's shares although shares have been sold to unrelated parties at values determined at that point in time. Due to the illiquidity of the shares in the company the majority of shares have been held by the original owners and passed down from generation to generation
It has become necessary to restructure the ownership of the taxpayer's business.
Legal advice has been obtained by the taxpayer to the effect that a new entity be created to conduct the operations of the business. The taxpayer will have no pecuniary interest in the new entity or the business.
The assets that are being disposed of by the taxpayer are goodwill, trading stock and plant & equipment.
A schedule showing details of all share transactions since 1985 has been provided.
This Ruling does not address when CGT assets were acquired.
Relevant legislative provisions
Section 149-30 of the Income Tax Assessment Act 1997
Section 149-15 of the Income Tax Assessment Act 1997
Reasons for decision
Division 149 of the Income Tax assessment Act includes the following:
Division 149 - When an asset stops being a pre-CGT asset Subdivision 149-B - When asset of non-public entity stops being a pre-CGT asset SECTION 149-30 Effects if asset no longer has same majority underlying ownership |
149-30(1) The 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. |
149-30(1A) Also, Part 3-1 and this Part (except this Division) apply to the asset as if the entity had acquired it at that earliest time. |
149-30(2) 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. |
The term majority underlying interest is defined by section 149-15 of ITAA 1997 as follows:
SECTION 149-15 Majority underlying interests in a CGT asset |
149-15(1) Majority underlying interests in a *CGT asset consist of: more than 50% of the beneficial interests that *ultimate owners have (whether directly or *indirectly) in the asset; and 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. |
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149-15(2) 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.
149-15(3) An ultimate owner is: an individual; or a company whose *constitution prevents it from making any distribution, whether in money, property or otherwise, to its members; or the Commonwealth, a State or a Territory; or a municipal corporation; or a local governing body; or the government of a foreign country, or of part of a foreign country. |
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149-15(4) An *ultimate owner indirectly has a beneficial interest in a *CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if: the other entity were to distribute any of its capital; and (b) the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner. |
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149-15(5) |
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An *ultimate owner indirectly has a beneficial interest in *ordinary income that may be *derived from a *CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of a *dividend or income if:
the other entity were to pay that dividend, or otherwise distribute that income; and
the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner.
The taxpayer has submitted that the majority underlying interest in its pre CGT assets are held by ultimate owners who had majority underlying interests in the assets immediately before 20 September 1985, (the advent of CGT), by the operation of subsection 149-30(3) and 149-30(4) of the ITAA 1997.
Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provides:
New owner standing in shoes of former owner
149-30(3) Subsection (4) affects how the *majority underlying interests in the asset are worked out if an *ultimate owner (the new owner) has acquired a percentage (the acquired percentage) of the *underlying interests in the asset because of an event described in column 2 of an item in the table. The former owner is the entity described in column 3 of that item. Events leading to new owner standing in for former owner Item For this kind of event: The former owner is: 1 *CGT event A1 or B1 if there is a roll-over under Subdivision 126-A (about marriage or relationship breakdowns) for the event the entity that, immediately before the event happened, owned the *CGT asset to which the event relates ........... 2 the death of a person that person |
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149-30(4) This section applies as if the new owner had (in addition to any other *underlying interests), at any time when the former owner had a percentage (the former owner's percentage) of the underlying interests in the asset, a percentage of the underlying interests in the asset equal to the acquired percentage, or the former owner's percentage at that time, whichever is the less. |
An analysis of the information provided by the taxpayer reveals that:
Some of the shares issued by the taxpayer had not changed hands since 20 September 1985.
Some of the share transfers since 20 September 1985 are transfers from deceased estates where the deceased acquired the shares prior to 20 September 1985.
The relevant amount of share transfers from deceased estates where the deceased acquired the shares prior to 20 September 1985 are treated as having been acquired by the new owners at the same time as they were actually acquired by subsections 149-30(3) and 149-30(4) of the ITAA 1997. As the shares were all acquired prior to 20 September 1985, they are all treated as being held by ultimate owners who had majority underlying interests in the assets immediately before 20 September 1985.
The resultant shares held by ultimate owners who had majority underlying interests in the assets immediately before 20 September 1985 equate to a beneficial interest of a majority percentage of the shares held. As such the majority underlying interest in the taxpayer's pre CGT assets are held by ultimate owners who had majority underlying interests in the assets immediately before 20 September 1985