Edited version of your written advice

Authorisation Number: 1012912514224

Date of advice: 17 November 2015

Ruling

Subject: Income tax - Capital gains tax and majority underlining interest

Question and answer

Is the Commissioner satisfied or find it reasonable to assume that for the purposes of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) that the majority underlying interests held in the pre-capital gains tax assets of the Company have been maintained. That is, at all times on and after 20 September 1985 and before the end of a given financial year majority underlying interests in the assets of the Company were held by ultimate owners who had majority underlying interests in the assets immediately before 20 September 1985 and subsections (1) and (1A) of section 149-30 of the ITAA 1997 will apply as if that were in fact the case?

Yes.

This ruling applies for the following period

1 July 2014 to 30 June 2015

The scheme commences on

1 July 2014

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1. Pre-Capital Gains Tax (CGT) the Company was incorporated.

2. The Company is a family company that has been used to acquire a number of investments over the years including rental properties, interest-bearing investments, units in trusts and shares in listed and unlisted companies. It has also undertaken other activities.

3. The Company has a mixture of pre and post CGT assets.

4. During the year of income ended 30 June xx xx, the Company sold a pre CGT asset.

5. As at 19 September 1985, the shareholding of the Company was as follows:

6. The current shareholding of the company is as follows:

7. The three companies, Company A, Company B, and Company C are the legal and beneficial owners of their shares. The other shareholders are individuals.

8. The shares held by the deceased were transferred to an individual in accordance with the Will of the deceased; who passed away post-CGT.

9. The preference shares held by Individual 5 and Individual 6 as at 19 September 1985 were transferred to Individual 1 and Individual 4, post -CGT.

10. There have been no other changes to the shareholding of the Company.

11. The shares have the following rights:

• The C, D, E and F class shares have similar rights.

• The A and B class shares have priority to a return of paid-up capital on a winding up, after preference shareholders.

• The preference shareholders have priority to dividends and to a return of paid-up capital on a winding up.

12. The redeemable preference shares have not been treated as part of a financing arrangement by the Company or its shareholders.

13. The Company adopted a new Constitution and in accordance with the new constitution, all shares have, subject to the terms of issue of particular shares:

• the right to vote at meetings of members,

• the right to receive dividends.

• the right to participate equally in the distribution of the assets of the company (both capital and surplus) in a winding up, subject only to any amounts unpaid on the shares.

14. There was no change in the share rights when the Company adopted the new Constitution.

15. The Constitution contains the rules in relation to the payment of dividends and includes the following:

• the directors may pay dividends as they see fit and to an extent allowed in accordance with section 254T of the Companies Code

• subject to the rights of holders of shares issued on special terms, a dividend may be declared and paid on the shares of one or more classes to the exclusion of the others

• if the directors determine to declare dividends on shares of more than one class, the dividend declared on the shares of the class may be at a higher or lower rate than or at the same rate as the dividend declared on the shares of the other class or classes.

Dividend history of the Company

16. Any dividends paid on preference shares have always been paid at the rate of x% (per share).

17. Dividends have on occasion been paid to individuals on A, B and C class shares.

18. When dividends have been paid to the company shareholders (Company A, B and Company C in respect of the D, E and F class shares), they have always been paid in equal amounts to the three companies, other than on three occasions.

Company C

19. Pre-CGT Company C was incorporated.

20. As at 19 September 1985, the shareholding of Company C was as follows:

21. As at the date of the CGT event the shareholders of Company C are:

22. Company E and Company F are the legal and beneficial owners of their shares.

23. Company D holds its shares as trustee of Trust 1. Trust 1 made a Family Trust Election. Trust 1 is administered for members of Individual 1's family.

24. In accordance with the Memorandum and Articles of Association of Company C:

• the capital is divided into ordinary shares, % preference shares and unclassified shares

• the % cumulative preference shares confer the following rights (Article 3(b)) on the holders:

• right to fixed cumulative preferential dividend of % per annum on the paid up capital in priority to any dividend payable on any other class of shares

• right in a winding up to have the paid-up capital paid off in priority to any payment of capital in relation to any other shares but shall not entitle the holders thereof to participate further in any surplus assets or profits of Company C

• right to attend meetings and vote like ordinary class shareholders

• right to an amount of votes for every % preference share held.

• The directors are able to capitalise any sum and then distribute that sum between members in a similar way that dividends can be distributed.

• Subject to any preferential rights conferred, the directors may declare dividends to one or more classes of shares to the exclusion of other classes and at different rates.

25. The dividend access shares have no voting rights attached, but have:

• "the right to receive dividends (if any) in such amount as is determined by the directors from time to time in their absolute discretion

• The right to repayment of capital paid up on the dividend access share on a winding up of the company but no further right to participate in assets."

26. Since they were issued, no dividends have been paid on the dividend access shares.

27. Dividends have only been paid to Individual 1 (in relation to their shareholding as an individual) and to Company D as trustee for Trust 1. Dividends have also always been paid on the preference shares in priority to the ordinary shares.

28. It is the intention of the directors of Company C that no dividends will ever be paid on the dividend access shares, and they are in the process of passing a resolution to amend the Company's Memorandum and Articles of Association to ensure that the dividend access shares do not have any entitlement to dividends.

Company B

29. Pre-CGT Company B was incorporated.

30. As at 19 September 1985, the shareholding of Company B was as follows:

31. As at the date of the CGT event the shareholders of Company B are:

32. Company H, Company I and Company J are the legal and beneficial owners of their shares.

33. Company G holds its shares as trustee of Trust 2. Trust 2 made a Family Trust Election. The trust is administered for members of Individual 8 and spouse's family.

34. Company B's share capital is divided into ordinary shares, x% cumulative preference shares and unclassified shares.

• In accordance with the Memorandum and Articles of Association of company B:

• The x% cumulative preference shares confer the following rights on the holders:

• The right to a fixed cumulative preferential dividend of x% per annum on the paid up capital in priority to any dividend payable on any other class of shares.

• The right in a winding up to have the paid-up capital paid off in priority to any payment of capital in relation to any other shares but shall not entitle the holders thereof to participate further in any surplus assets or profits of Company B.

• The right to attend meetings and vote at meetings like ordinary shareholders.

• The right to an amount votes for every one % cumulative preference share held.

• The directors are able to capitalise any sum and then distribute that sum between members in a similar way that dividends can be distributed.

• Subject to any preferential special deferred or other rights conferred, the directors may declare dividends to one or more classes of shares to the exclusion of other classes and at different rates.

35. Since they were issued, no dividends have been paid on the dividend access shares. Dividends have only been paid to Individual 8 (in relation to their shareholding as an individual) and to the trustee of Trust 2. Trust 2 has only ever made distributions to members of Individual 8 and spouse's family.

36. It is the intention of the directors of Company B that no dividends will ever be paid on the dividend access shares, and they are in the process of passing a resolution to amend the Company's Memorandum and Articles of Association to ensure that the dividend access shares do not have any entitlement to dividends.

Company A

37. Pre-CGT Company A was incorporated.

38. As at 19 September 1985, the shareholding of Company A was as follows:

39. As at the date of the CGT event the shareholders of Company A are:

40. Company L, Company M and Company N are the legal and beneficial owners of their shares.

41. Company K holds its shares as trustee of Trust 3. Trust 3 made a Family Trust Election. The trust is administered for members of Individual 3's family.

42. Company A's share capital is divided into ordinary shares, % cumulative preference shares and dividend access shares.

43. Company A's Memorandum and Articles of Association was replaced with a Constitution.

44. The Constitution of Company A provides the following:

• The % cumulative preference shares confer the following rights on the holders:

• The right to a fixed cumulative preferential dividend of % per annum on the paid up capital in priority to any dividend payable on any other class of shares.

• right in a winding up to have the paid-up capital paid off in priority to any payment of capital in relation to any other shares but shall not entitle the holders thereof to participate further in any surplus assets or profits of Company A.

• The right to attend meetings and vote at meetings like other shareholders.

• The right to an amount of votes for every one % cumulative preference share held.

• The ordinary shares confer the following rights on holders:

• The right to attend and vote at meetings

• The right to be paid in cash the amount paid up on the shares in the case of a winding up of the company

• The right to the payment of a dividend determined to be payable by the directors on that class of shares

• The right to participate in surplus assets or profits of the company.

• The directors have the right to issue ordinary and preference shares and to determine the rights attached to those shares.

• The directors may pay dividends out of profits in any way they see fit, subject to any rights or restrictions attached to any shares. The directors may pay dividends on different classes of shares and at different rates and they may be franked to the extent determined by the directors.

• The directors may capitalise any profits and distribute that capital to members in the same proportion that members are entitled to dividends.

• On winding up any surplus must be divided amongst amounts paid up or payable on the shares of all members.

45. Company A has regularly paid dividends on the Dividend Access Shares. For the period from xxx to xxx the proportion of dividends paid on the dividend access shares each year has ranged from x% to x% of total dividends paid.

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 subsection 149-15(3)

Income Tax Assessment Act 1997 subsection 149-30(1)

Income Tax Assessment Act 1997 subsection 149-30(1A)

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

Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the rules which govern when an asset acquired by a taxpayer before 20 September 1985 is treated as being acquired after that date for capital gains tax (CGT) purposes.

Under subsection 149-30(1) of the ITAA 1997, a pre-CGT asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset are not held by the ultimate owners who held such interests just before 20 September 1985.

The terms 'ultimate owner' and 'majority underlying interest' are central to the operation of Division 149 of the ITAA 1997.

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.

Subsection 149-15(1) of the ITAA 1997 provides that majority underlying interests in a CGT asset consists of:

• more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

• 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.

Subsection 149-30(2) of the ITAA 1997 provides that if the Commissioner is satisfied or thinks it reasonable to assume that at all times on and after 20 September 1985 and before a particular time majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day, subsection 149-30(1) and 149-30(1A) apply as if that were in fact the case. That is, subsection 149-30(2) provides scope for the Commissioner to simply be satisfied that there was continuity of majority underlying beneficial interests.

Interests in the assets of the Company

In accordance with the Company's constitution, all the various classes of shares have an entitlement to receive capital distributions in relation to those shares. As at 19 September 1985 the majority of the Company's shares were held by the three family companies (Company C, Company B, and Company A) and the Deceased.

Pursuant to the will of the Deceased, the shares held by them were transferred to Individual upon death. Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner on the death of a person (former owner), the new owner is treated as having held the underlying interest of the former owner for the period the former owner held them.

Currently, these 4 entities still hold a majority of the shares in the Company. However, to ensure that Division 149 is not triggered, it is necessary to drill down to the ultimate individual owners of the interests in the Company.

As at 19 September 1985 approximately % of the issued shares in Company C, Company B and Company A were held by Individual 1, Individual 2 and Individual 3 respectively, which gives each of these individuals approximately % underlying interest in the Company. Additionally, % of the shares in these three companies were held by the respective family trusts, giving each trust a % underlying interest in the Company.

Therefore, as at 19 September 1985 at least 50% of the majority underlying interest in the Company was held by Individual 1, Individual 2 and Individual 3 (% each) the Deceased (%), and Trust 1, Trust 2 and Trust 3 (% each).

In post-CGT Company C, company B and Company A each issued three dividend access shares to family companies. These dividend access shares all contain a discretionary right to dividends in preference to all other shareholders, at the discretion of the directors.

In the case of Company A, dividends have been regularly paid out in relation to these dividend access shares, and therefore, Company A can no longer be considered as part of the underlying interest.

In the case of Company C and Company B no dividends have been paid on the dividend access shares since they were issued.

IT 2340 Income tax: Capital Gains: Deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date discusses adopting a look through approach when determining which natural persons hold the beneficial interests for the purposes of section 160ZZS of the Income Tax Assessment Act 1936 (ITAA 1936), which preceded Division 149 of the ITAA 1997. IT 2340 suggests that regard can be had to the historical distributions made when considering if there has been any change to the underlying ownership for the purposes of section 160ZZS (now Division 149of the ITAA 1997).

…5. In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised.

6. Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion.

7. In such a case the Commissioner would, in terms of sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed. That is consistent with the role of the section to close potential avenues for avoidance of tax in cases where there is a substantial change in underlying ownership of assets and the legislative guidance contained in Subdivision G of Division 3 of Part III of the Act. On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provisions of the Act.

Given that there have been no distributions made in relation to these dividend access shares, and both company C and Company B are in the process of removing the right to dividends attached to the shares, the Commissioner considers it reasonable to assume that for all practical purposes the majority underlying interests in each company has not changed for the purposes of Division 149.