| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012767405947
Ruling
Subject: Majority underlying interest
Question 1
Will Division 149 of the Income Tax Assessment Act 1997 be triggered where 50% of the shares in the company are transferred to the ultimate owner on liquidation of an interposed entity?
Answer
No
This ruling applies for the following periods:
1 July 2014 to 30 June 2016
The scheme commences on:
1 July 2014
Relevant facts and circumstances
• Company A is an Australian private company
• The members of Company A are:
• Individual X (50% of the membership, Z shares)
• Company B (50% of the membership, Z shares)
• Company B is an Australian private company
• Individual X holds 100% of the membership in Company B ( Q shares)
• Company B was placed into a member's voluntary liquidation in January 20XX
• Individual X became a member of both companies on the death of her/his parent, Individual Z, in 20YY
• Individual Z held his/her shares in both companies prior to 20 September 1985
• Membership in each company was transferred to Individual X as part of distribution of Individual Z's estate
• The underlying assets of Company A are a mix of pre and post Capital Gains Tax (CGT) assets
• The liquidator of Company B will make an in-specie liquidators distribution of the 50% membership in Company A to Individual X
• On completion of Company B's liquidation Individual X will hold 100% of the membership in Company A
Relevant legislative provisions
Income Assessment Act 1997 Section 128-15
Income Assessment Act 1997 Division 149
Reasons for decision
Issue 1
Continuity of majority underlying interest under Division 149 of the Income Tax Assessment Act 1997
Question 1
Will Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) be triggered where 50% of the shares in the company are transferred to the ultimate owner on liquidation of an interposed entity?
Summary
Majority underlying interests in a pre-CGT asset consists of more than 50% of the beneficial interests in the asset and in any ordinary income that may be derived from the asset held (whether directly or indirectly) by ultimate owners.
As Company B will be voluntarily liquidated and the assets distributed to Company A, Individual X will retain her/his majority underlying interest and will hold a 100% direct beneficial interest.
Detailed reasoning
The terms majority underlying interests, underlying interests and ultimate owner, are central to the operation of both Division 149 and subdivision 149-C of the ITAA 1997. Majority underlying interests in a pre-CGT asset consists of more than 50% of the beneficial interests in the asset and in any ordinary income that may be derived from the asset held (whether directly or indirectly) by ultimate owners: subsection 149-15(1) of the ITAA 1997. An underlying interest in a pre-CGT asset is a beneficial interest that an ultimate owner has, directly or indirectly, in the asset or in any ordinary income that may be derived from it: subsection 149-15(2) of the ITAA 1997. An ultimate owner includes individuals, certain government bodies and companies whose constitutions prevent distributions of any kind to their members: subsection 149-15(3) of the ITAA 1997.
Subsection 149-15(4) of the ITAA 1997 provides that 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:
a. 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.
Similarly, subsection 149-15(5) of the ITAA 1997 provides that 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:
a. the other entity were to pay that dividend, or otherwise distribute that income, and
b. the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner.
Subsections 149-15(4) and (5) of the ITAA 1997 test the existence of indirect beneficial interests by respectively hypothesising that an individual would receive, for his or her own benefit, any capital or dividends or income distributed by an entity that is then successively distributed through each interposed entity.
As a result of the voluntary liquidation of Company B, Individual X will no longer hold shares in Company B. Once the liquidator has made an in-specie distribution of Company B's assets, Individual X will hold 100% of the membership in Company A.
Individual X retains her/his majority underlying interest as she/he has a 100% direct beneficial interest in Company B when it has been fully liquidated. Once an in-specie distribution of assets has been made she/he will hold a 100% direct beneficial interest in Company A.