Edited version of your written advice

Authorisation Number: 1012917029297

Date of advice: 26 November 2015

Ruling

Subject: Pre CGT assets

Question 1

Will Division 149 of the Income Tax Assessment Act 1997 (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 2

Will Division 149 apply to stop the asset being a pre-CGT asset if the shares owned by Shareholder B are transferred to Person A as a result of Shareholder B's death?

Answer:

No.

Question 3

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 one of the ordinary 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 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 when Director A ceases to be a director and the amendments to the voting powers as noted in question 3 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.

Director A has at all times been a director of the company.

You were incorporated in 19XX.

Just before 20 September 1985, the ordinary shareholders were:

• Y x ordinary class share held by Shareholder A.

• Z x ordinary class share held by Shareholder B.

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

The current Constitution of the company was adopted in 19VV.

There have been no changes in share rights or beneficial ownership since 20 September 1985.

There are no plans to change the current shareholdings.

The current shareholders as per ASIC records are:

• Y x ordinary class share held by Shareholder A.

• Z x ordinary class share held by Shareholder B.

All dividends have been paid to the ordinary shareholders in the proportion of their ownership percentage since 1985.

In the event of Shareholder B's death, their share is transferred to Person A.

Proposed amendments

It is proposed that the following amendments are made to your documents.

Amendment 1

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

Amendment 2

The rights of the shares are to be modified such that Person B has super majority voting powers for such time as he is the holder of one or more of those shares.

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

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 if each share on issue is split into 3 shares in accordance with section 254H of the Corporations Law (C Law).

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 shares in Company A before 20 September 1985.

In your case, it is accepted that you acquired 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 19VV income year to have acquired the asset on or after 20 September 1995 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 Company A 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.

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. …

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:

• Y x ordinary class share held by Shareholder A.

• Z x ordinary class share held by Shareholder B.

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

To identify the ultimate owners who held beneficial interests in the income that may be derived from the property just before 20 September 1985, it is necessary to look at the individual shareholders who would have been entitled to receive any income distribution made by the company at that time.

You state that since 1985, all dividends have been paid to the ordinary shareholders in the proportion of their ownership percentage.

Based on the above information, it is determined that 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.

Proposed share split

In your case, you propose to make amendments to your existing 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. Each new share will have the same rights and obligations as the original share. 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 2

Summary

Division 149 will not apply to stop the asset being a pre-CGT asset if the shares owned by Shareholder B are transferred to Person A as a result of Shareholder B's death.

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 shareholders being Shareholder A and Shareholder B 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.

For this purpose, if a person holds an interest in an asset because it was transferred to him or her by way of a marriage breakdown rollover or because of the death of a person, the person is taken to have held the interests held by the former owner over the years.

In this scenario, the shares held by Shareholder B are passed to Person A (the new owner) in the event of Shareholder B's death (the former owner).

Based on this information, it is reasonable to assume that at all times on and after 20 September 1985 and before Shareholder B's death, the majority underlying interests in the asset were held by the same ultimate owners who held majority underlying interests in the asset immediately before that day, the asset continues to be a pre-20 September 1985 asset.

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.

Question 3

Summary

Division 149 of the ITAA 1997 will not apply to stop your assets being pre-CGT assets if the rights of one of the ordinary 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 shareholders being Shareholder A and Shareholder B 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 existing documents to amend the rights of the ordinary class shares to be modified such that when held by Person B, Person B has super majority voting powers for such time as he is the holder of one or more of those shares.

Varying the rights of one of the ordinary 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 one of the ordinary class shares 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 ordinary class shares.

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

Question 4

Summary

Division 149 of the ITAA 1997 will not 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 3 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 and Shareholder B 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 the rights of one of the ordinary shares are modified such that Person B will obtain super majority voting powers in the event Director A ceases to be a director. Shareholder A and Shareholder B will continue to be the ultimate owners who hold more than 50% of the beneficial interest in your capital and income. Director A ceasing to be a director does not change the ultimate owners.

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 Director A ceases to be a director in you and the rights of one of the ordinary shares are modified such that Person B will obtain super majority voting powers in the event Director A ceases to be a director.