Edited version of your written advice

Authorisation Number: 1012813500800

Ruling

Subject: Application for Private Ruling: Income tax - Capital gains tax - CGT assets

Question 1

Did any of the share dealings in Company X since 20 September 1985, as described in the Ruling, impact the majority underlying interest in the assets of Company X for the purposes of either former section 160ZZS of the ITAA 1936 or Division 149 of the ITAA 1997, and thereby deem a pre CGT asset held by the company to stop being a pre-CGT asset?

Answer

No.

This ruling applies for the following periods:

Up to the year ended 30 June 2015.

The scheme commences on:

20 September 1985.

Relevant facts and circumstances

Company X holds a bundle of assets on capital account which were acquired prior to the introduction of the CGT regime.

Pursuant to the Articles of Association or Constitution of Company X, the share capital is divided into different classes of shares. Dividends may be declared on one or more classes of shares to the exclusion of other classes. The various classes of shares confer pro-rata rights to the capital of Company X upon winding up.

All shares were issued to several individuals and Company Y prior to 1985.

As at 19 September 1985, the shareholders held the shares in the proportions as per the following table:

Since 20 September 1985, there have been eight dealings in the shares of Company X:

The 8 dealings in the shares are chronologically detailed as follows:

• Reclassification of Shares: the Company's Articles of Association were amended such that A class shares (held by Individual A) and over 400 ordinary shares were reclassified as cumulative special shares ("CSS"). The CSS were not issued to the shareholders until December 1985. Dividends have not been paid on the CSS and are unlikely to be paid in the future.

• In 19xx, Company X redeemed all RPS held by Company Y.

• In 19xx, a single ordinary share was issued to individual C, bringing their ordinary shareholding to %. Following this transaction, Individual B held a % interest in ordinary shares, and Individual D held a % interest in ordinary shares.

• In 19xx, following the passing of Individual A, their entire shareholding was transferred to Individual B and Individual C as follows:

• CSS were transferred to Individual B and CSS were transferred to Individual C

• A class shares were transferred to Individual B and A class shares were transferred to Individual C, and one A class shares was transferred to Individual B and Individual C jointly.

• In 19xx, Individual D sold their shares to Individual B and Individual C, so that Individual B and Individual C each held a % interest in the D class and CSS shares and % and % interest respectively in the ordinary shares.

• In 19xx, a single ordinary share was issued to Individual B, bringing Individual B's ordinary shareholding to % and Individual C's to %.

• In 19xx, the Life Governor's share (Ordinary Share) ceased to exist and was converted into a single ordinary share, held by Individual B and Individual C jointly. One third of this ordinary share was held on trust for new shareholders, (children of Individual D). In 20xx, the trust arrangement in respect of this ordinary share ended, so that Individual B and Individual C became the beneficial owner of the share.

• Individual B passed away in 20xx. Pursuant to the terms of their will, their shares in Company X were bequeathed to Company Z, and transferred in 20xx. All shares with rights to income and capital in Company Z are held by both of Individual B's children.

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(3)

Income Tax Assessment Act 1936 former Subsection 160ZZRR(1)

Income Tax Assessment Act 1936 former Section 160ZZS

Income Tax Assessment Act 1936 former Section 160ZZS(1)

Reasons for decision

Where more than one half of the beneficial interests in a privately held company change after 20 September 1985, former subsection 160ZZS(1) of the ITAA 1936, and similarly subsection 149-30(1) of the ITAA 1997, will cause all of the company's assets, that were acquired prior to 20 September 1985, to lose their pre-CGT status.

The first number of share dealings is to be considered under former section 160ZZS of the ITAA 1936, as they occurred prior to 1 July 1998, whereas the X^th share dealing is to be considered under Division 149 of the ITAA 1997, as it occurred post 1 July 1998.

Former section 160ZZS ITAA 1936

Former subsection 160ZZS(1) provides that an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset.

Former subsection 160ZZRR(1) provides that majority underlying interests, in relation to an asset, mean more than one-half of:

(a) the beneficial interests that natural persons hold (whether directly or indirectly) in the asset; and

(b) the beneficial interests that natural persons hold (whether directly or indirectly) in any income that may be derived from the asset.

The test has two elements that must be satisfied. The first is that beneficial interests must be held by natural persons whether directly or indirectly in the asset, and the second is that beneficial interests must be held by natural persons whether directly or indirectly in any income that may be derived from the asset.

In relation to the first element, immediately before 20 September 1985, Individuals B and C between them owned % of the underlying interests in the assets of the company. After 1985 and following each of the share dealings, the same individuals continued to own % of the underlying interests in the assets of the company (as the shareholders of company Z are taken to have the same interests as Individual B, pursuant to Item 2 of subsection 149-30(3) of the ITAA 1997). It is immaterial if there is a change in the individual proportions in which the natural persons hold interests in the assets, as long as the same natural persons which held a majority of the interests at 19 September 1985 continue together to hold a majority of the interests in the relevant assets - per Taxation Ruling IT 2530.

In relation to the second element, Company X has discretion to pay dividends to particular classes of shares to the exclusion of other classes, and to pay dividends at different rates on different classes of shares. Taxation Ruling IT 2340 and ATO ID 2011/101 are of assistance here, and provide that where there is no appointment of new beneficiaries, or new shareholders to the group, then the Commissioner would consider it reasonable to assume that there has been no change in the majority underlying interests.

Whilst new shareholders, being the children of Individual D, were introduced into the membership of the group, they could only ever be entitled to a maximum % in the dividends of Company X, as dividends could only be declared to the exclusion of other classes, not to the exclusion of other shares or shareholders.

Accordingly, the share dealings therefore did not cause a change in the majority underlying interests in company X, and so the pre-CGT assets of the group continued to be pre-CGT assets.

Neither former section 160ZZS of the ITAA 1936 or Division 149 of the ITAA 1997 applied to deem assets acquired before 20 September 1985 to have been acquired by the company after that date.