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Ruling

Subject:

Changes to majority underlying interests in a company

When CGT assets of a company stop being pre-CGT assets

Whether market value of property of company acquired on or after 20 September 1985 triggers CGT event K6

Question 1

Are the majority underlying interests in the pre-CGT assets of a company (Company X) held by some of the same ultimate owners who had majority underlying interests in those pre-CGT assets immediately before 20 September 1985?

Answer

Yes.

Question 2

Will CGT event K6 in section 104-230 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the taxpayer sells the shares it acquired before 20 September 1985 in Company X?

Answer

No.

Question 3

Can the taxpayer disregard the capital gains tax it will make upon the sale of its shares that it acquired in Company X before 20 September 1985?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below.

Immediately before 20 September 1985, all the shareholders of Company X were other companies.

All the shareholder companies and Company X were non-public companies.

The taxpayer is one of these shareholder companies.

Each of the shareholder companies directly held its shares in Company X, and each held equal interests in Company X.

The ultimate owners of Company X immediately before 20 September 1985 included the shareholders of the taxpayer and of the other companies.

Shortly after 20 September 1985, an individual shareholder of one of the companies died.

The deceased held shares in that company immediately before 20 September 1985 and continued holding those shares until their death.

Some of the deceased's shares in that company passed to individual shareholders of the taxpayer and the other companies.

At some time after 20 September 1985, the number of shareholders in Company X decreased. The taxpayer and an other company have continued to hold shares in Company X and acquired additional shares from the former shareholders.

From that later time, the taxpayer and the other company each directly held an increased number of shares in Company X, which together exceeded 50% of the shares in Company X.

The market value of property acquired by Company X after 19 September 1985 represented less than 75% of the company's net worth.

Market values of properties owned by Company X were provided by professional valuers.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 149-B

Income Tax Assessment Act 1997 section 149-10

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 section 149-25

Income Tax Assessment Act 1997 section 149-30

Income Tax Assessment Act 1997 section 104-230

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

Income Tax Assessment Act 1997 subsection 104-230(5)

Income Tax Assessment Act 1997 subsection 104-230(6)

Reasons for decision

Question 1

Are the majority underlying interests in the pre-CGT assets of Company X held by some of the same ultimate owners who had majority underlying interests in those pre-CGT assets immediately before 20 September 1985?

Summary

Based on the information provided regarding the shareholders of the taxpayer and the shareholders of Company X, the majority underlying interests in the pre-CGT assets of Company X are held by ultimate owners who had majority underlying interests in those pre-CGT assets immediately before 20 September 1985.

Detailed reasoning

Up until 20 September 1985, the taxpayer and an other company were not the only shareholders of Company X. The individuals who were and remain the shareholders of the taxpayer and the other company, did not hold majority underlying interests in the pre-CGT assets of Company X immediately before 20 September 1985.

However as a result of inheriting shares in another company after 20 September 1985 and due to the operation of subsections 149-30(3) and (4) of the ITAA 1997 an individual shareholder of the taxpayer, and an individual shareholder of the other company are both treated as holding additional underlying interests in the pre-CGT assets of Company X before 20 September 1985.

When these additional underlying interests are included with the already existing underlying interests in the pre-CGT assets of Company X, then the shareholders of the taxpayer and of the other company are treated as together holding underlying interests exceeding 50% in the pre-CGT assets of Company X immediately before 20 September 1985. In coming to our decision, we took account of ATO Interpretative Decision ATO ID 2010/99.

At all times after the additional shares were inherited, the shareholders of the taxpayer and of the other company have together held underlying interests exceeding 50% of the underlying interests.

Therefore, for the purposes of Subdivisions 149-A and 149-B of the ITAA 1997, the majority underlying interests in the pre-CGT assets of Company X have always been held by ultimate owners who had majority underlying interests in those pre-CGT assets immediately before 20 September 1985.

Question 2

Will CGT event K6 in section 104-230 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when the taxpayer sells the shares it acquired before 20 September 1985 in Company X?

Detailed Reasoning

CGT event K6 in section 104-230 of the ITAA 1997 happens if:

§ you own shares in a company that you acquired before 20 September 1985; and

§ CGT event A1 in section 104-10 of the ITAA 1997 happens in relation to the shares; and

§ There is no roll-over for the other CGT event; and

§ Just before the other event happens the market value of the property in the company (that is not trading stock) that was acquired on or after 20 September 1985 is at least 75% of the company's net value.

In the present case the market value of the property which Company X acquired on or after 20 September 1985 other than its trading stock is according to the valuation that was provided less than 75% of the company's net value.

Therefore CGT event K6 in section 104-230 of the ITAA 1997 will not happen when the taxpayer sells the shares it acquired before 20 September 1985 in GP.

Question 3

Can the taxpayer disregard the capital gains tax it will make upon the sale of its shares that it acquired in Company X before 20 September 1985?

Detailed Reasoning

As the shares the taxpayer owns in Company X are still considered to have been acquired before 20 September 1985 then in accordance with paragraph 104-10(5)(a) of the ITAA 1997 any capital gains on the disposal of those shares will be disregarded.