Edited version of private advice

Authorisation Number: 1012653889420

Ruling

Subject: Pre-CGT assets - ultimate owners

Issue 1 Pre-CGT assets

Question 1

Has the company at all times on and after 20 September 1985 to 30 June 2014, been the ultimate owner of its CGT assets pursuant to paragraph 149-15(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997), such that any pre-CGT assets have not stopped being pre-CGT assets pursuant to section 149-30.

Answer

No

This ruling applies for the following period(s)

Prior to 20 September 1985 to year ending 30 June 2014

The scheme commences on

Prior to 20 September 1985

Relevant facts and circumstances

The company is a public company limited by shares and guarantee. There are no shares on issue.

The company is not an entity of a kind covered by section 149-50 of the ITAA 1997.

As at 19 September 1985 the company owned a number of properties. At this time the company was governed by its constitution and the legislation which governed the industry.

In relation to the winding up of the company the constitution provided that should the dissolution of the Company be agreed to by a General Meeting, such dissolution shall be carried out in conformity with the legislation that governed the industry.

Under the industry legislation, the company could be dissolved by consent of five-sixths of its members and by award of the Public Actuary. The division of the surplus funds and property of the company must be set out in the instrument of dissolution which shall set forth -

(a) the liabilities and assets of the company

(b) the number of members and the nature of their interests in the company:

(c) the claims of creditors (if any) and the provision to be made for their payment:

(d) the intended appropriation or division of the funds and property of the

company, unless the same is stated in the instrument of dissolution to be left

to the award of the Public Actuary.

There are no provisions in the governing legislation which prevent a distribution to members on dissolution.

Relevant legislative provisions

Income Tax Assessment Act 1997 (ITAA 1997):

Section 149-10

Subsection 149-15(3)

Paragraph 149-15(3)(b)

Subsection 149-30(1)

Subsection 995-1

Reasons for decision

Question 1

Note: all legislative references below are to the ITAA 1997 unless stated otherwise.

Summary

The company does not meet the definition of ultimate owner contained in paragraph 149-15(3)(b) on or after 20 September 1985.

Detailed reasoning

Division 149 contains the rules that govern when an asset stops being a pre-CGT asset. Under section 149-10 an entity owns a pre-CGT asset if

(a) the entity last acquired the asset before 20 September 1985; and

(b) the entity was not, immediately before the start of the 1998-99 income year, taken under: (i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936; or (ii) Subdivision C of Division 20 of former Part IIIA of that Act; to have acquired the asset on or after 20 September 1985; and

(c) the asset has not stopped being a pre-CGT asset of the entity because of this Division.

Subdivision 149-B provides that an asset of an entity not covered by section 149-50, such as the company, stops being a pre-CGT asset at the earliest time when the 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 (subsection 149-30(1)).

In light of the terms used in subsection 149-30(1), to answer the ruling question 'yes' would require two findings:

• that immediately before 20 September 1985 the company was the ultimate owner who had the underlying interest in the asset as defined in paragraph 149-15(3)(b); and

• that at all times on and after 20 September 1985 until 30 June 2014, the company had majority underlying interests in the assets as defined in subsection 149-15(1).

An 'ultimate owner' is defined in subsection 149-15(3) and includes 'an individual' (paragraph 149-15(3)(a)) and 'a company whose *constitution prevents it from making any distribution, whether in money, property or otherwise, to its members' (paragraph 149-15(3)(b)). The constitution of a company is defined in subsection 995-1 to mean 'the memorandum and articles of association of the company, or any other rules or document constituting the company or governing its activities'.

'Majority underlying interests' in a CGT asset are defined in subsection 149-15(1) as consisting 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.

ATO Interpretative Decision ATO ID 2010/98 Capital gains tax: majority underlying interests-ultimate owners considers the meaning of the word 'prevents' and addresses whether a company can be an ultimate owner if its constitution provides that rights to surplus assets on winding up are to be determined under legislation and that legislation does not prevent a distribution to members.

The ordinary meaning of 'prevents' is considered by reference to the Macquarie Dictionary, 2005, 4th edition, The Macquarie Library Pty Ltd, NSW, which defines 'prevent' as 'to keep from occurring; hinder ... to cut off beforehand or debar (a person, etc.), as from something'.

ATO ID 2010/98 concludes that in its ordinary meaning, an action is prevented where it is not possible that it will happen. And therefore:

Taking into account the ordinary meaning of the word 'prevent' and the context in which it appears, for the purposes of paragraph 149-15(3)(b) of the ITAA 1997 a constituent document of a company will prevent the making of a distribution to members where it is reasonable to conclude that the effect of that document, taken with the surrounding legal context, is that it is not possible for the company to make distributions to members.

On and before 20 September 1985, the constitution of the company stated that the dissolution of the company shall be carried out in conformity with the legislation governing the industry. The constitution and the industry legislation together formed the constitution of the company immediately before 20 September 1985.

As described in the facts, the industry legislation provided the ways in which a company could be dissolved and required the instrument of dissolution to set forth the number of the members and their interests in the company, as well as the intended appropriation and division of funds and property of the company.

Neither the constitution nor the industry legislation expressly provide for any distribution on dissolution to be made to members of the company. This, however, is not the test required by paragraph 149-15(3)(b), which requires the constitution of the company to prevent any distribution to members. The terms of the constitution and the industry legislation did not prevent a distribution to members on dissolution of the company, as it is possible under the industry legislation that such distributions could have been made.

On the facts of this arrangement, the company does not meet the definition of ultimate owner in paragraph 149-15(3)(b). Therefore, the company would not have had majority underlying interests in the CGT asset immediately before 20 September 1985.