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Ruling

Subject: Capital gains tax and majority underlying interest

Question 1

Will the existence of a life interest in an estate to the spouse of the deceased, trigger Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No

Question 2

Will the transfer of shares from a deceased estate to a child of the deceased and a further transfer of those shares from the child's deceased estate to their children, trigger Division 149 of the ITAA 1997?

Answer:

No

Question 3

Will the addition of the new classes of shareholders holding post-capital gains tax (CGT) I, J & K class shares trigger Division 149 of the ITAA 1997?

Answer:

No

This ruling applies for the following period

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commenced on

1 July 2012

Relevant facts and circumstances

The arrangement that is the subject of the Ruling is described below.

This description is based on the following documents. These documents form part of and are to be read with this description.

The relevant documents are:

· the application for private ruling, and

· letter from your lawyers dated X

· letter from your lawyers dated Y

The company was incorporated prior to 20 September 1985.

The company owns a number of assets acquired prior to 20 September 1985.

The company is considering entering voluntary liquidation and disposing of those pre-CGT assets, and passing the proceeds to its shareholders.

A number of shares previously held by a Shareholder 1 were transferred to their child Shareholder 2 (bequeathed in their will)

Later, shares issued to Shareholder 2's spouse, Shareholder 8.

Shareholder 2 subsequently died.

Shareholder 2's will, provides that:

· the income of Shareholder 2's estate is to be paid to their spouse Shareholder 7 (who is still alive) during their lifetime.

· the capital and residuary of Shareholder 2's estate is to be divided amongst their children; as tenants in common in equal shares

Share issued to Shareholder 3's spouse, Shareholder 9.

Share issued to Shareholder 6's spouse, Shareholder 10.

Different rights attached to various share classes.

Amendments to the articles of association of the company amended the share's rights.

You have provided an analysis of dividend payments which shows a consistent pattern of distributions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

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

Income Tax Assessment Act 1997 Subsection 149-30(1A)

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

Income Tax Assessment Act 1997 Section 149-35

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

Summary

The existence of a life interest in the estate to the spouse of the deceased, will not trigger Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) as pre-capital gains tax (CGT) interests held by the deceased retain their pre-CGT status when transferred as a result of the death of the deceased.

The transfer of shares from a deceased estate to a child of the deceased and a further transfer of those shares from the child's deceased estate to their children will not trigger Division 149 of the ITAA 1997 as pre-CGT interests held by the deceased retain their pre-CGT status when transferred as a result of the death of the deceased.

The addition of the new classes of shareholders holding post-CGT I, J & K class shares will not trigger Division 149 of the ITAA 1997 as the new shareholders have not received more than 50% of any dividend income since their inception and they no longer have a right to any dividend income. In addition they do not hold more than 50% of the beneficial interest in the assets of the company.

Detailed reasoning

Majority underlying interest

Subsections 149-30(1) and 149-30(1A) of the Income Tax Assessment Act 1997 (ITAA 1997) provide that an asset stops being a pre-capital gains tax (CGT) asset at the earliest time when majority underlying interests in the asset were not held by the ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. This applies to the asset as if the entity had acquired the asset at the earliest date when majority underlying interest changed.

Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of:

· the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and

· the beneficial interests that ultimate owners have (whether directly or indirectly) in any income that may be derived from the asset.

Accordingly, ultimate owners who held majority underlying interests in an asset just before 20 September 1985 must retain such interests after that date, otherwise Division 149 of the ITAA 1997 will be triggered to convert the asset into a post-CGT asset.

In these cases, the asset is deemed to have a new date of acquisition (the date the majority underlying interest changed). Section 149-35 of the ITAA 1997 provides that the deemed first element acquisition costs for the purposes of determining the cost base (and reduced cost base), will be the market value of the asset at the time of change.

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 149-30(1) and 149-30(1A) of the ITAA 1997 apply as if that were in fact the case. That is, subsection 149-30(2) of the ITAA 1997 provides scope for the Commissioner to simply be satisfied that there was continuity of majority underlying beneficial interests.

Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner by way of a marriage breakdown rollover or because of the death of a person (former owner), the 'new owner' is treated as having held the underlying interest of the 'former owner' for the period the 'former owner' held them.

On the death of shareholder 1, their shareholdings passed to their child, shareholder 2. Under subsections 149-30(3) and 149-30(4) of the ITAA 1997, shareholder 2 is taken to have held the underlying interests held by shareholder 1 for the period the shareholder 1 held the shares. Accordingly, the shares transferred from shareholder 1 to shareholder 2 retain their pre-CGT status.

On the death of shareholder 2, their shareholdings devolve to their spouse, shareholder 7. Under subsections 149-30(3) and 149-30(4) of the ITAA 1997, shareholder 7 is taken to have held the underlying interests held by shareholder 2 for the period the deceased's child held the shares. Accordingly, the shares transferred from shareholder 2 to shareholder 7 retain their pre-CGT status.

On the future death of shareholder 7, all their shareholdings will devolve to their children; shareholders 3, 4, 5 and 6 in equal shares. Again, according to subsections 149-30(3) and 149-30(4) of the ITAA 1997, the shares will retain their pre-CGT status in the hands of the children.

As at 19 September 1985, the underlying interests in the company were held by shareholder 1, 2, 3, 4, 5, 6, 7. At this date, together, they held 100% of the shares between them and consequently the majority underlying interests.

Post 20 September 1985 and up until Z, the underlying interests in the company were held by; shareholders 2, 3, 4, 5, 6, 7 (with shareholder 2 holding shareholder 1's pre-CGT underlying interests in the company). At this date, together, they held all the shares, thereby holding 100% of the issued shares of the company between them and consequently the same individuals continue to hold the majority underlying interests in the company.

The company later issued one new class of share to shareholder 8. Then a new class share was issued shareholder 9. Later, a new class share was issued to shareholder 10. The issue of new classes of shares to shareholders 8, 9 and 10 (post-CGT shareholders,) introduced new shareholders to the company in whose favour a distribution of income could be made.

Due to the discretionary right to dividends which all the shares carry, the company can distribute the dividends to these new shareholders to the exclusion of the other shareholders (the pre-CGT shareholders). This means that the company could pay 100% of any dividends to the post-CGT shareholders.

Accordingly, the possibility exists that the ultimate owners (pre-CGT shareholders) who between them collectively had majority underlying interests in the asset immediately before 20 September 1985 may receive less than 50% of the ordinary income that may be derived by the company from the asset.

However, you have provided an analysis of the dividend distribution showing that in no year did the holders of the post-CGT classes of shares receive more than 50% of the dividend income.

In addition, amendments to the articles of association of the company states that shares held by post-CGT shareholders no longer have any rights to receive dividends.

Based on this information, the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985, the majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day.

Accordingly, Division 149 of the ITAA 1997 will not be triggered by any of the events discussed above.