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Edited version of your private ruling
Authorisation Number: 1012442812911
Ruling
Subject: Capital gains tax
Question and Answer
Have the shares in the Company stopped being pre CGT assets for the purpose of Division 149 of the Income Tax Assessment Act (ITAA 1997)?
No
This ruling applies for the following period:
Year ended 30 June 2013
The scheme commenced on:
1 July 2012
Relevant facts and circumstances
The Company was established before 20 September 1985.
Shares were issued to Shareholder A and Shareholder B and a few other family members.
Immediately before 20 September 1985, the total shareholding of Shareholder A and Shareholder B was more than 50% of the shareholding of the Company.
Shareholder A died after 20 September 1985 and their share was transferred to shareholder B.
Following the death of shareholder A, shareholder B held more than 50% of the shareholding of the Company.
There were a few changes regarding the classes of shares and the number of shares held between the family members. However, no new shareholders were introduced and after each change, Shareholder B continued to hold a majority of the underlying interest in the Company.
Shareholder B died.
At the time of Shareholder B's death, shareholder B held more than 50% of the shareholding of the Company.
In accordance with shareholder B's will, shareholder B's shares will be transferred equally to the beneficiaries.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 149-10.
Income Tax Assessment Act 1997 Subsection 149-15(1).
Income Tax Assessment Act 1997 Section 149-30.
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
Under section 149-30 of the Income Tax Assessment Act (ITAA 1997), an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985.
'Majority underlying interests' is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of:
(a) the beneficial interests that 'ultimate owners' have (whether directly or indirectly) in the asset, and
(b) the beneficial interests that 'ultimate owners' have (whether directly or indirectly) in any income that may be derived from the asset.
The shareholders of the Company are treated as having beneficial interests in the shares of the Company, and are the 'ultimate owners' of the shares. These interests, in the shares and in income derived from the shares, are represented by the shareholdings.
Calculation of change in majority underlying interests
Death of shareholder A
A change to the shareholding occurred on the death of shareholder A after 20 September 1985 when the share held by shareholder A was transferred to shareholder B.
The transfer of the share to shareholder B will not cause any change in the majority underlying interests in the shares to happen, as shareholder B is taken to have held the same interests as those held by shareholder A, being the former owner (Item 2 of subsection 149-30(3) of the ITAA 1997).
Under subsection 149-30(4) of the ITAA 1997, shareholder B is taken to have an underlying interest in the shares equal to the sum of shareholder B's original interest and the lesser of the acquired interest or shareholder A's interest at any time when shareholder A had a percentage of the underlying interests in the shares.
Changes in shareholding
There were a few changes regarding the classes of shares and the number of shares held between the family members. However, no new shareholders were introduced and after each change, Shareholder B continued to hold a majority of the underlying interest in the Company. Thus Division 149 of the ITAA 1997 was not triggered as a result of each change of shares.
Death of shareholder B
Shareholder B died. In accordance with shareholder B's will, shareholder B's shares will be transferred equally to the beneficiaries.
Under subsection 149-30(4) of the ITAA 1997, the beneficiaries are taken to have an underlying interest in the shares equal to the sum of their original interest and the lesser of the acquired interest or shareholder B's interest at any time when shareholder B had a percentage of the underlying interests in the shares.
As shareholder B was deemed to have held more than 50% of the shares with a pre CGT status, the change in ownership due to death is ignored under subsection 149-30(3) of the ITAA 1997, and the beneficiaries are treated as stepping into the shoes of shareholder B and holding more than 50% of the shares before 20 September 1985.
As shareholder B always held more than 50% of the underlying interest in the shares of the Company, Division 149 of the ITAA 1997 was not triggered as a result of the death of shareholder B.