Edited version of your written advice

Authorisation Number: 1012835792320

Ruling

Subject: pre-CGT asset determination

Question 1

From the evidence given, is the Commissioner satisfied that at the end of the test day the majority underlying interests in the pre-CGT assets were had by ultimate owners who also had majority underlying interests in the asset at the end of the starting day, in accordance with the condition of subsection 149-60(1) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 September 2014

The scheme commences on:

20 December 1985

Relevant facts and circumstances

1. The Company has a substituted accounting period with year ending 30 September.

2. The pre-CGT assets held by the Company include real property and a shareholding in a subsidiary.

3. At year end 2014 the Company had fully paid ordinary shares on issue and preference shares. The ordinary shares have the usual rights to receive dividends and full returns of capital with one vote per share. The preference shares have rights to receive a cumulative dividend, with no rights to a share in capital beyond the amount paid per share. Preference shares entitle holders to 4 votes per share at any general shareholder meeting if dividends are in arrears. No preference dividends are currently in arrears.

4. The total shareholding of majority owners at 20 December 1985 was at least 57% and at 30 September 2014 it was at least 69%.

5. Corporate shareholders holding shares in their own right are pre-1985 companies in which there has not been any change in the underlying majority ownership post 1985.

6. Corporate shareholders holding shares as trustee for a trust have had no changes to the trust deed or beneficiaries post 1985.

7. This ruling is based on evidence provided by the client.

Relevant legislative provisions

Income Tax Assessment Act 1997 division 149

Income Tax Assessment Act 1997 division 149-C

Income Tax Assessment Act 1997 section 149-15

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

Income Tax Assessment Act 1997 subsection 149-15(3)

Income Tax Assessment Act 1997 subsection 149-15(4)

Income Tax Assessment Act 1997 subsection 149-15(5)

Income Tax Assessment Act 1997 section 149-55

Income Tax Assessment Act 1997 subsection 149-55(1)

Income Tax Assessment Act 1997 subsection 149-55(1A)

Income Tax Assessment Act 1997 subsection 149-55(2)

Income Tax Assessment Act 1997 section 149-60

Income Tax Assessment Act 1997 subsection 149-60(1)

Income Tax Assessment Act 1997 section 149-70

Income Tax Assessment Act 1997 subsection 149-70(1)

Reasons for decision

All references are to the Income Tax Assessment Act 1997 (ITAA 1997)

Summary

Based solely on the evidence provided, the Commissioner is satisfied that at the end of the test day, the majority underlying interests in the assets were had by ultimate owners who also had majority underlying interests in the asset at the end of the starting day. The condition of subsection 149-60(1) is satisfied and the asset retains its pre-CGT status.

Detailed reasoning

Division 149 determines when a pre-CGT asset will be taken to be acquired after 19 September 1985. The rules for public entities are found in Division 149-C.

An asset stops being a pre-CGT asset by operation of subsection 149-70(1) if the condition in subsection 149-60(1) is not satisfied.

Subsection 149-60(1) requires the following:

On the basis solely of the evidence given to the Commissioner under subsection 149-55(1), the Commissioner must be satisfied that, or think it reasonable to assume that, at the end of the test day, majority underlying interests in the asset were had by ultimate owners who also had majority underlying interests in the asset at the end of the starting day.

Subsection 149-55(1) requires written evidence about the majority underlying interests in the asset at the end of each test day to be given to the Commissioner within 6 months after each test day.

The evidence must be in a form that makes the information about those interests readily apparent. (subsection 149-55(1A))

The test days are 30 June 1999, a day that is 5 years (or a multiple of 5 years) after 30 June 1999 and a day where there is abnormal trading in the shares of the company. (subsection 149-55(2))

The starting day is 19 September 1985 or another date to be chosen under subsection 149-60(2) which is between 1 July 1985 and 30 June 1986 and gives a reasonable approximation of the ultimate owners who had majority underlying interest in the assets of the entity at 19 September 1985.

The terms 'ultimate owner' and 'majority underlying interest' are central to the provision.

Ultimate owner is defined in subsection 149-15(3) of the ITAA 1997 to include individuals and companies whose constitutions prevent them from making distributions of any kind to their members.

Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 to mean more than 50% of the beneficial interests that ultimate owners have, whether directly or indirectly, in the asset and in any ordinary income that may be derived from the asset.

Subsections 149-15(4) and 149-15(5) establish when an ultimate owner indirectly has a beneficial interest in the pre-CGT asset through other entities.

149-15(4)

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.

149-15(5)

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.

Application of Division 149-C to the Company

The Company provided the Commissioner written evidence about the majority underlying interest within 6 months of the test day.

As the Company has a substituted accounting period the test day for this determination is their year end.

The Company has selected a starting day in accordance with subsection 149-60(2).

From the evidence provided it can be determined that the ultimate shareholders who held a majority underlying interest in the Company on the starting day, continue to hold the majority underlying interest at the test day. Where the shareholders are corporate trustees holding the shares on trust, we are satisfied that the ultimate owners have not changed where the beneficiaries to those trusts, according to the terms of the trust deed, have not changed since the starting day.

Accordingly, we are satisfied that at the end of the test day, the majority underlying interests in the assets were had by ultimate owners who also had majority underlying interests in the asset at the end of the starting day.

The condition in subsection 149-60(1) is satisfied and the asset retains its pre-CGT status.