Edited version of your written advice

Authorisation Number: 1012916192533

Date of advice: 23 November 2015

Ruling

Subject: Pre CGT Assets

Question 1

Did Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to stop your assets being pre-CGT assets when your constitution which is silent of the different classes of ordinary share, was adopted in 19XX?

Answer

No.

Question 2

Assuming the response to the preceding question is no, will Division 149 of the ITAA 1997 apply to stop your assets from being a pre-CGT assets if, by unanimous resolution, your members acknowledge that the memorandum and articles of association of the company as lodged at the Corporate Affairs Commission continue to be in force as they apply to the rights of classes of shares?

Answer:

No.

Question 3

Assuming the response to each of the preceding questions is no, did Division 149 of the ITAA 1997 apply to stop your assets being pre-CGT assets when some steps were taken regarding issuing an E class share in 19XX (but no such share was issued)?

Answer:

No.

Question 4

Assuming the response to each of the preceding questions is no, will Division 149 of the ITAA 1997 apply to stop your assets being pre-CGT assets if part of the Articles of Association is deleted?

Answer:

No.

Question 5

Assuming the response to each of the preceding questions is no, will Division 149 of the ITAA 1997 apply to stop your assets being pre-CGT assets if that part of the Articles of Association noted in the proposed amendment is deleted?

Answer:

No.

Question 6

Assuming the response to each of the preceding questions is no, will Division 149 of the ITAA 1997 apply to stop your assets being pre-CGT assets if each share on issue is split into 3 shares in accordance with section 254H of the Corporations Law?

Answer:

No.

Question 7

Assuming the response to each of the preceding questions is no, will Division 149 of the ITAA 1997 apply to stop your assets being pre-CGT assets if the rights of the one of the "A" class shares are modified such that Person B will obtain super majority voting powers in the event that Director A ceases to be a director of the company?

Answer:

No.

Question 8

Assuming the response to each of the preceding questions is no, will Division 149 of the ITAA 1997 apply to stop your assets being pre-CGT assets when Director A ceases to be a director and the amendments to the voting powers as noted in Question 7 take effect?

Answer:

No.

Question 9

Assuming the response to each of the preceding questions is no, will Division 149 of the ITAA 1997 apply to stop your assets being pre-CGT assets if the Articles of Association is amended with effect from the date of death of Director A to restrict the ability of the directors to pay dividends on selected classes of shares?

Answer:

No.

Question 10

Assuming the response to each of the preceding questions is no, will Division 149 of the ITAA 1997 apply to stop your assets being pre-CGT assets when the amendments to the Articles of Association noted in Question 8 take effect?

Answer:

No.

This ruling applies for the following periods:

1 July 2015 to 30 June 2016

1 July 2016 to 30 June 2017

1 July 2017 to 30 June 2018

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You are a private company.

You were incorporated before 20 September 1985.

Part of the Articles of Association provides that the classes of ordinary shares all carry the same rights and privileges and conditions with regards to voting, dividends, return of capital on a reduction of capital and on a winding up.

You are able to pay a dividend to any one or more class or classes of shares.

Just before 20 September 1985, the ordinary shareholders were:

• 1 x ordinary A class share held by shareholder A

• 1 x ordinary B class share held by shareholder B

• 1 x ordinary C class share held by shareholder C

• 1x ordinary D class share held by shareholder D

You acquired shares in Company A before 20 September 1985. These are the pre-CGT assets which are the subject of this ruling.

No changes have been made to the Memorandum of Articles of Association since 20 September 1985.

The current Constitution of the company was adopted in July 19CC. It is silent on the different classes of ordinary shares.

There were some steps taken regarding issuing an additional E class share. There steps including filing a notice with ASIC regarding the issue of one share. However, no such share was ever issued. No share subscription application was ever lodged with the company. Your directors never resolved to issue a share. No share subscription money was ever paid to you. No share certificate was ever issued by you.

The current shareholders are:

• 1 x ordinary A class share held by shareholder A

• 1 x ordinary B class share held by shareholder B

• 1 x ordinary C class share held by shareholder C

• 1x ordinary D class share held by shareholder D

There have been no changes in share rights or beneficial ownership since 20 September 1985. There are no plans to change the current shareholdings.

Since 1985, dividends have only been paid to the A class or B class shareholders. No other class of shareholder has received a dividend.

It is proposed that amendments will be made to some of the provisions in your constitutional documents which involve deleting some provisions.

The Memorandum and Articles of Association are, by way of unanimous resolution, acknowledged by your members as continuing to be in force to the extent they apply to the class rights set out in the Articles of Association.

Each share you have issued will be split into three with each new share having the same rights and obligations as the original share.

The rights of one of the A class shares are to be modified such that, when held, has super majority voting powers.

The Articles of Association will be amended to restrict the ability of directors to pay dividends on particular classes of shares to the exclusion of others.

Relevant legislative provisions

Division 149 of the ITAA 1997

Section 149-10 of the ITAA

section 149-15 of the ITAA 1997

section 149-30 of the ITAA 1997

section 149-50 of the ITAA 1997

former section 160ZZS of the ITAA 1936

subsection 82KZC(1) of the ITAA 1936

Reasons for decision

Question 1

Summary

Division 149 of the ITAA 1997 will not apply to stop your assets being pre-CGT assets when your constitution which is silent of the different classes of ordinary share.

Detailed reasoning

Division 149 of the ITAA 1997 determines when an asset acquired on or before 19 September 1985 stops being a pre-CGT asset.

Section 149-10 of the ITAA 1997 states:

A CGT asset that an entity owns is a pre-CGT asset if, and only 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 (ITAA 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.

In your case, the pre-CGT asset that is the subject to this ruling is the shares you acquired from Company A.

Paragraph (a)

In respect to paragraph 149-10(a) of the ITAA 1997, you have stated that you acquired the shares in Company A before 20 September 1985.

In your case, it is accepted that you acquired the shares in Company A before 20 September 1985.

Paragraph (b)

In respect to paragraph 149-10(b) of the ITAA 1997, you state you were not taken immediately before the start of the 19XX income year to have acquired the asset on or after 20 September 1985 under either of:

• former subsection 160ZZS(1) of the ITAA 1936, or

• Subdivision C of Division 20 of former Part IIIA of that Act.

Former subsection 160ZZS(1) of the ITAA 1936 stated:

For the purposes of the application of this Part in relation to a taxpayer, 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.

Taxation Ruling IT 2340 provides guidance on the administration of former 160ZZS of the ITAA 1936.

In order for an asset not to be deemed to have been acquired after 19 September 1985 due to the operation of former subsection 160ZZS(1) of the ITAA 1936, the Commissioner must be satisfied or consider it reasonable to assume, that the majority underlying interests in the asset have not changed during the period 19 September 1985 to 30 June 1998.

Former subsection 160ZZS(3) of the ITAA 1936 defined majority underlying interests when applying 160ZZS(1) as having the same meaning as in Subdivision 3G of Part III.

Majority underlying interests is defined in subsection 82KZC(1) of the ITAA 1936 to mean more than one-half of:

(a) The beneficial interests that natural persons hold (whether directly or through one or more interposed companies, partnerships or trusts) in the property, and

(b) The beneficial interests held by natural persons (whether directly or through one or more interposed companies, partnerships or trusts) in any income that may be derived from the property.

To identify the ultimate owners who held beneficial interests in the asset and income just before 20 September 1985, it is necessary to look at the individual shareholders who would have been entitled to receive any capital and income distributions made by the company at that time.

Paragraph (c)

In respect to paragraph 149-10(c) of the ITAA 1997, it must be determined whether your shares in A Company have not stopped being a pre-CGT asset because of current Division 149.

As you are a private company, Subdivision 149-B applies to you in relation to non-public entities). The entities described in section 149-50 of the ITAA 1997 do not apply to you.

Subsection 149-30(1) of the ITAA 1997 states:

The asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the assets were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985.

Subsection 149-15(1) of the ITAA 1997 defines majority underlying interests as

Majority underlying interests in a CGT asset consist of:

(a) More than 50% of the beneficial interest 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.

Subsection 149-15(2) of the ITAA 1997 defines an underlying interest as:

An underlying interest in a CGT asset is a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset.

An ultimate owner is defined in subsection 149-15(3) of the ITAA 1997 to include an individual or companies whose constitution prevents it from making any distribution, whether in money, property or otherwise to its members.

Subsection 149-15(4) of the ITAA 1997 states:

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.

Subsection 149-15(5) of the ITAA 1997 states:

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.

Beneficial interests in capital

To identify the ultimate owners who held beneficial interests in your capital just before 20 September 1985, it must be determined which individual shareholders would have been entitled to receive any capital distributions made by the company at that time.

In your case, just before 20 September 1985, the ordinary shareholders were:

• 1 x ordinary A class share held by shareholder A

• 1 x ordinary B class share held by shareholder B

• 1 x ordinary C class share held by shareholder C

• 1x ordinary D class share held by shareholder D

The Articles of Association provides that A, B, C and D class ordinary shares all carry the same rights, privileges and conditions as regards to voting, dividends, return of capital on a reduction of capital and on a winding up.

A new constitution was adopted by you. This Constitution recognises that the share capital of the company may be divided into different classes of shares. However, no capital distributions rights have changed or were intended to change by adopting this Constitution.

Based on this information, it is determined that more than 50% of the beneficial interests in your capital were held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

Beneficial interests in income

The Articles of Association provides for the company, at its discretion, to declare and distribute dividends and capitalised profit to shareholders of any one or more classes of shares to the exclusion of the shares of any other class or classes. However, all A, B, C and D classes of shares hold the same rights to dividends. Consequently between the four shareholders, they all held a beneficial interest in your income

The Constitution is silent on the different classes of shares.

You state that since 1985, all dividends have been paid to A and B class shareholders in each year. As a result, more than 50% of the beneficial interests in your income have been held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

Based on the above information, the Constitution adopted in 19XX did not cause Division 149 to apply to stop your assets being pre-CGT assets. The ultimate owners continued to hold majority underlying interests in your pre-CGT assets just before 20 September 1985 and continued to do so after the constitution was adopted.

Question 2

Summary

Division 149 of the ITAA 1997 will not apply to stop your assets from being a pre-CGT assets if, by unanimous resolution, your members acknowledge that the memorandum and articles of association of the company continue to be in force as they to the rights of classes of shares.

Detailed reasoning

As discussed under Question 1, Division 149 of the ITAA 1997 determines when an asset acquired on or before 19 September 1985 stops being a pre-CGT asset.

It is accepted that you acquired the shares in Company A before 20 September 1985.

Beneficial interests in capital

As discussed at Question 1 under the heading Beneficial interests in capital, it was determined that the following shareholders:

• Shareholder A

• Shareholder B

• Shareholder C

• Shareholder D

were the ultimate owners who held more than 50% the beneficial interest in your capital and were at all times held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985

Beneficial interests in income

As discussed at Question 1 under the heading Beneficial interests in income, more than 50% of the beneficial interests in your income have been held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

Based on the above information, a unanimous resolution of your members acknowledging your Memorandum and Articles of Association as lodged at the Corporate Affairs Commission will continue to be in force to the extent they apply to class rights will not cause Division 149 to apply to stop your pre-CGT assets being pre-CGT assets. As determined in Question 1, the ultimate owners who continued to hold majority underlying interests in your pre-CGT assets just before 20 September 1985 will continue to do so after any unanimous resolution of the Memorandum and Articles of Association as lodged.

Question 3

Summary

Division 149 of the ITAA 1997 will not apply to stop your assets being pre-CGT assets when steps were taken regarding the issuing an E class share in 19XX (but no such share was issued).

Detailed reasoning

As discussed under Question 1, Division 149 of the ITAA 1997 determines when an asset acquired on or before 19 September 1985 stops being a pre-CGT asset.

It is accepted that you acquired the shares in Company A before 20 September 1985.

Beneficial interests in capital

As discussed at Question 1 under the heading 'Beneficial interests in capital', it was determined that the following shareholders:

• Shareholder A

• Shareholder B

• Shareholder C

• Shareholder D

were the ultimate owners who held more than 50% the beneficial interest in your capital and were at all times held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

Beneficial interests in income

As discussed at Question 1 under the heading Beneficial interests in income, more than 50% of the beneficial interests in your income have been held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

In October 19XX, some steps were taken regarding the issue of additional E class shares. However, no E class shares were issued. Based on this information, more than 50% of the beneficial interests in your capital were at all times held by the same ultimate owners.

The Articles of Association enables you to declare a dividend to one or more classes of shares to the exclusion of another class or classes of shares While the right of each shareholder to receive the dividends was at your discretion, the shareholders held all the beneficial interests in the income.

Steps were taken regarding the issuing of an additional E class share. However, no such share issued.

Based on the above information, the steps taken to issue E class shares in 19XX did not cause Division 149 to apply to stop your assets being pre-CGT assets as the ultimate owners who continued to hold majority underlying interests in your pre-CGT assets just before 20 September 1985 continued to do so at all times as no E class shares issued.

Question 4

Summary

Division 149 of the ITAA 1997 will not apply to stop your assets being pre-CGT assets if a provision of the Articles of Association is deleted.

Detailed reasoning

As discussed under Question 1, Division 149 of the ITAA 1997 determines when an asset acquired on or before 19 September 1985 stops being a pre-CGT asset.

It is accepted that you acquired the shares in Company A before 20 September 1985.

You propose that a provision of the Articles of Association will be deleted.

Beneficial interests in capital

As discussed at Question 1 under the heading 'Beneficial interests in capital', it was determined that the following shareholders:

• Shareholder A

• Shareholder B

• Shareholder C

• Shareholder D

were the ultimate owners who held more than 50% the beneficial interest in your capital and were at all times held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985

Beneficial interests in income

As discussed at Question 1 under the heading Beneficial interests in income, more than 50% of the beneficial interests in your income have been held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

In your ruling, you propose to amend the Articles of Association by deleting a provision.

The Article of Associations provides special privileges in relation to the class B ordinary shares in the event of Director A and Person A not being a director. As of the date of this ruling, Person A has never been a director when Director A has not been a director. This Article has never been in force.

You further state that the removal of this provision of the Article of Association will not impact on the beneficial interests in the CGT asset or the income derived from the CGT asset.

It is accepted that Person A has never been a director at the time when Director A has not been a director.

Based on the information provided, it would appear deleting this provision of the Articles of Association will not cause Division 149 of the ITAA 1997 to apply to stop your assets being pre-CGT assets as the ultimate owners who continue to hold majority underlying interests in your pre-CGT assets just before 20 September 1985.

Question 5

Summary

Division 149 of the ITAA 1997 will not apply to stop your assets being pre-CGT assets if that part of a provision of the Articles of Association noted in the proposed amendment is deleted.

Detailed reasoning

As discussed under Question 1, Division 149 of the ITAA 1997 determines when an asset acquired on or before 19 September 1985 stops being a pre-CGT asset.

It is accepted that you acquired the shares in Company A before 20 September 1985.

You propose that a provision of the Articles of Association will be deleted.

Beneficial interests in capital

As discussed at Question 1 under the heading 'Beneficial interests in capital', it was determined that the following shareholders:

• Shareholder A

• Shareholder B

• Shareholder C

• Shareholder D

were the ultimate owners who held more than 50% the beneficial interest in your capital and were at all times held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985

Beneficial interests in income

As discussed at Question 1 under the heading Beneficial interests in income, more than 50% of the beneficial interests in your income have been held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

In your ruling, you propose to amend the Articles of Association by deleting part of a provision.

The Article of Associations provides changes to the share capital in the event that Director A ceases to be a director in you. As of the date of this ruling, it is accepted that Director A has always been and is currently a director of you. This provision has never taken effect.

You further state that the removal of part of the provision of the Article of Association will not impact on the beneficial interests in the CGT asset or the income derived from the CGT asset.

Based on the information provided, deleting part of the Articles of Association of the Company will not cause Division 149 of the ITAA 1997 to apply to stop your assets being pre-CGT assets as the ultimate owners who continued to hold majority underlying interests in your pre-CGT assets just before 20 September 1985 will continue to do so after the deletion of this provision.

Question 6

Summary

Division 149 of the ITAA 1997 will not apply to stop your assets being pre-CGT assets if each of your share on issue is split into 3 shares in accordance with section 254H of the Corporations Law (C Law).

Detailed reasoning

As discussed under Question 1, Division 149 of the ITAA 1997 determines when an asset acquired on or before 19 September 1985 stops being a pre-CGT asset.

It is accepted that you acquired the shares in Company A before 20 September 1985.

Beneficial interests in capital

As discussed at Question 1 under the heading Beneficial interests in capital, it was determined that the following shareholders:

• Shareholder A

• Shareholder B

• Shareholder C

• Shareholder D

were the ultimate owners who held more than 50% the beneficial interest in your capital and were at all times held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985

Beneficial interests in income

As discussed at Question 1 under the heading Beneficial interests in income, more than 50% of the beneficial interests in your income have been held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

Taxation Determination TD 2000/10 discusses the CGT consequences if a company converts its shares into a larger number of shares.

Paragraph 1 of TD 2000/10 states:

If a company converts its shares into a larger or smaller number of shares ('the converted shares') in accordance with section 254 of the C Law in that:

(a) The original shares are not cancelled or redeemed in terms of the C Law;

(b) There is no change in the total amount allocated to the share capital account of the company; and

(c) The proportion of equity owned by each shareholder in the share capital account is maintained;

no CGT event happens to the shareholder's original shares for capital gains purpose. Where there is a change in the form of the original shares, there is no change in their beneficial ownership. …

Paragraph 2 of TD 2000/10 states that the converted shares have the same date of acquisition as the original shares to which they relate. That is, if the original shares were acquired before 20 September 1985 (pre CGT shares), the converted shares have the same acquisition date.

Paragraph 4 of TD 2000/10 states:

Cancelling original share certificates and replacing them with new certificates as part of any conversion process does not change the result above, unless there is also a cancellation or redemption of the original shares in terms of the C Law. …

In your case, you propose to make amendments to your constitutional documents to undertake a one for three shares split, tripling the total number of shares as in accordance with section 254H of the C Law. At this point, there is no change in the total amount of share equity and the proportion of equity owned by each shareholder is maintained. The proposed split will not change the beneficial ownership of the shares. The share split will not change the majority underlying interest in you.

Splitting each share into 3 will not cause Division 149 of the ITAA 1997 to apply to stop your shares being pre-CGT assets as the ultimate owners who continue to hold majority underlying interests in your the pre-CGT assets before 20 September 1985 continue to hold majority voting interests after the share split.

Therefore, Division 149 of the ITAA 1997 will not apply to stop the assets being pre-CGT assets if each share on issue is split into 3 shares.

Question 7

Summary

Division 149 of the ITAA 1997 will not apply to stop your assets being pre-CGT assets if the rights of the one of the "A" class shares are modified such that Person B will obtain super majority voting powers in the event that Director A ceases to be a director of the company.

Detailed reasoning

As discussed under Question 1, Division 149 of the ITAA 1997 determines when an asset acquired on or before 19 September 1985 stops being a pre-CGT asset.

It is accepted that you acquired the shares in Company A before 20 September 1985.

Beneficial interests in capital

As discussed at Question 1 under the heading Beneficial interests in capital, it was determined that the following shareholders:

• Shareholder A

• Shareholder B

• Shareholder C

• Shareholder D

were the ultimate owners who held more than 50% the beneficial interest in your capital and were at all times held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985

Beneficial interests in income

As discussed at Question 1 under the heading Beneficial interests in income, more than 50% of the beneficial interests in your income have been held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

In your ruling, you propose to make amendments to your constitutional documents to amend the rights of one of the 'A' class shares to be modified such that when held by Person B, Person B also has super majority voting powers in the event that Director A ceases to be a director in you.

Varying the rights of one of the 'A' class shares to provide super majority voting powers will not impact the beneficial interests in the CGT assets or the income derived from the assets.

Based on the information provided, varying the rights of the A class share to provide majority voting powers will not cause Division 149 of the ITAA 1997 to apply to stop your assets being pre-CGT assets as the ultimate owners who continued to hold majority underlying interests in your pre-CGT assets just before 20 September 1985 will continue to do so after the variation of the A class share.

Therefore, Division 149 of the ITAA 1997 will not apply to stop the assets being pre-CGT assets if the A share is varied.

Question 8

Summary

Division 149 of the ITAA 1997 will not apply to stop your assets being pre-CGT assets when A Director ceases to be a director and the amendments to the voting powers as noted in question 7 take effect.

Detailed reasoning

As discussed under Question 1, Division 149 of the ITAA 1997 determines when an asset acquired on or before 19 September 1985 stops being a pre-CGT asset.

It is accepted that you acquired the shares in Company A before 20 September 1985.

Beneficial interests in capital

As discussed at Question 1 under the heading Beneficial interests in capital, it was determined that the following shareholders:

• Shareholder A

• Shareholder B

• Shareholder C

• Shareholder D

were the ultimate owners who held more than 50% the beneficial interest in your capital and were at all times held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

Beneficial interests in income

As discussed at Question 1 under the heading Beneficial interests in income, more than 50% of the beneficial interests in your income have been held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

In your ruling, you propose to make amendments to your constitutional documents in that Director A would cease to be a director of you and Person B will be given super majority voting powers.

This change would not impact the beneficial interests in the pre CGT assets or the income derived from those assets.

Based on the information provided, this amendment to your constitutional documents would not cause Division 149 of the ITAA 1997 to apply to stop your assets being pre-CGT assets as the ultimate owners continue to hold the majority underlying interests in your pre-CGT assets just before 20 September 1985 will continue to do so after the variation of the documents.

Question 9

Summary

Division 149 of the ITAA 1997 will not apply to stop your assets being pre-CGT assets if the Articles of Association is amended with effect from the date of death of Director A to restrict the ability of the directors to pay dividends on selected classes of shares.

Detailed reasoning

As discussed under Question 1, Division 149 of the ITAA 1997 determines when an asset acquired on or before 19 September 1985 stops being a pre-CGT asset.

It is accepted that you acquired the shares in Company A before 20 September 1985.

Beneficial interests in capital

As discussed at Question 1 under the heading Beneficial interests in capital, it was determined that the following shareholders:

• Shareholder A

• Shareholder B

• Shareholder C

• Shareholder D

were the ultimate owners who held more than 50% the beneficial interest in your capital and were at all times held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

Beneficial interests in income

As discussed at Question 1 under the heading Beneficial interests in income, more than 50% of the beneficial interests in your income have been held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

In your ruling, you propose to amend the Articles of Association to restrict the ability of the directors to pay dividends on particular classes of shares to the exclusion of others.

The amendment to the Articles of Association will have no impact on the beneficial interests in the CGT assets or the income derived from the asset. The Article will provide changes to the dividend rights from the time of the death of Director A.

As the death of Director A has not occurred, these changes have not been implemented. The proposed amendment of the Articles of Association will not impact on the beneficial interests in the CGT asset or the income derived from the asset.

Based on the information provided, amending the Articles of Association to restrict the ability of the directors to pay dividends on selected classes of shares, effective from the date of death of Director A will not cause Division 149 of the ITAA 1997 to apply to stop your assets being pre-CGT assets as the ultimate owners who continued to hold the majority underlying interest in your pre-CGT asset just before 20 September 1985 will continue to do so after the amendment.

Question 10

Summary

Division 149 of the ITAA 1997 will not apply to stop your assets being pre-CGT assets when the amendments to the Articles of Association noted in Question 8 take effect.

Detailed reasoning

As discussed under Question 1, Division 149 of the ITAA 1997 determines when an asset acquired on or before 19 September 1985 stops being a pre-CGT asset.

It is accepted that you acquired the shares in Company A before 20 September 1985.

Beneficial interests in capital

As discussed at Question 1 under the heading Beneficial interests in capital, it was determined that the following shareholders:

• Shareholder A

• Shareholder B

• Shareholder C

• Shareholder D

were the ultimate owners who held more than 50% the beneficial interest in your capital and were at all times held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

Beneficial interests in income

As discussed at Question 1 under the heading Beneficial interests in income, more than 50% of the beneficial interests in your income have been held by the same ultimate owners who held more than 50% of the interest just before 20 September 1985.

Subsection 149-30(1) of the ITAA 1997 determines when an asset of a non-public entity stops being a pre-CGT asset. This subsection states:

The asset stops being a pre-CGT asset at the earliest time when 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(2) of the ITAA 1997 states:

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, subsections (1) and (1A) apply as if that were in fact the case.

Subsection 149-30(3) of the ITAA 1997 states:

Subsection (4) affects how the *majority underlying interests in the asset are worked out if an *ultimate owner (the new owner) has acquired a percentage (the acquired percentage) of the *underlying interests in the asset because of an event described in column 2 of an item in the table. The former owner is the entity described in column 3 of that item.

Subsection 149-30(4) of the ITAA 1997:

This section applies as if the new owner had (in addition to any other underlying interests), at any time when the former owner had a percentage (the former owner's percentage) of the underlying interests in the asset, a percentage of the underlying interests in the asset equal to the acquired percentage, or the former owner's percentage at that time, whichever is the less.

Taxation Ruling IT 2530 considers whether there can be an actual change in control as between shareholders without a change occurring in majority underlying interests in a pre-CGT asset and not trigger Division 149 of the ITAA 1936.

Paragraph 10 of IT 2530 discusses that if the persons who immediately before 20 September 1985 held more than one half of the underlying interests in an asset continue to hold more than one half of the underlying interests at all times on and after that date, there will be no change in the majority underlying interests in the asset. In these circumstances a change in the proportions in which the persons held interests in the asset would not have a bearing. The following example illustrates this point:

Immediately before 20 September 1985 underlying interests in an asset of a company were owned by four individuals in the following proportions:

A - 90%

B - 5%

C - 3%

D - 2%.

Following a change in the shareholding of the company after 20 September 1985, the underlying interests in the asset were owned by the individuals in the following proportions:

A - 1%

B - 2%

C - 48%

D - 0%

E - 49%.

The individuals who owned underlying interests both immediately before 20 September 1985 and after the change in ownership were A, B and C. Immediately before 20 September 1985 A, B and C between them owned more than one half of the underlying interests (that is, 98%). After the change A, B and C between them still owned more than one half of the underlying interests (that is, 51%). Accordingly, more than one half of the underlying interests in the company's asset continued to be held by the same persons. Section 149-30 would therefore not apply to deem the asset acquired by the company before 20 September 1985 to have been acquired on or after that date.

In your ruling, you propose to make amendments to your constitutional documents in the event that Director A would cease to be a director and Person B will be given super majority voting powers.

You further state in the ruling that the shares held by Director A (the former owner) pass to a new owner on the event of their death.

As determined in Question 8, the amendment to the Article of Association will not impact on the beneficial interests in your pre-CGT asset as the four shareholders continue to hold the majority underlying interests in your pre-CGT assets just before 20 September 1985 will continue to do so after the variation of the documents.

The amendment to the Articles of Association will not impact on the beneficial interests in your pre-CGT asset as all four shareholders (albeit it through the beneficiaries of the estate) will continue to be entitled to 100% of your capital both before and after the change.

The amendment will also mean that all four shareholders (albeit it through the beneficiaries of the estate) will still be able to receive 100% of the dividends from you. The amendment means the directors will lose the discretion to make payments only to one shareholder. That is, the shareholders will be entitled to 100% of the income of the assets both before and after the change.

In the scenario that the shares held by Director A pass to a new owner on the event of their death, the individuals who owned underlying interests both immediately before 20 September 1985 and after the change in ownership would be Shareholder B, Shareholder C and Shareholder D. Immediately before 20 September 1985 Shareholder B, Shareholder C and Shareholder D between them owned more than one half of the underlying interests. After the change Shareholder B, Shareholder C and Shareholder D between them still own more than one half of the underlying interests. Accordingly, more than one half of the underlying interests in the company's asset would continue to be held by the same persons. Section 149-30 of the ITAA 1997 would therefore not apply to deem the asset acquired by the company before 20 September 1985 to have been acquired on or after that date.

The proposed changes to the Articles of Association to restrict the ability of the directors to pay dividends on selected classes of shares taking effect on the date of death of Director A will not cause Division 149 to apply to stop your assets being pre-CGT assets as the ultimate owners who continued to hold majority underlying interests in your pre-CGT assets just before 20 September 1985 will continue to do so after the changes.