Edited version of your written advice

Authorisation Number: 1012987734118

Date of advice: 22 March 2016

Ruling

Subject: Capital gains - Pre-CGT asset - change in underlying ownership of assets in a company

Question 1

With respect to the terms of former section 160ZZS of the Income Tax Assessment Act 1936 (ITAA 1936), will the Commissioner be satisfied, or consider it reasonable to assume, that, at all times from September 1985 until immediately before the start of the 1998-99 income year, the majority underlying interests in the asset owned by the company were held by persons who, immediately before 20 September 1985, held the majority underlying interests in the pre-CGT land?

Answer

Yes

Question 2

With respect to the terms of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997), does the Commissioner agree that following the person's death and the individual inheriting the shares previously held by the deceased, the asset remains a pre-CGT asset of the company?

Answer

Yes

This ruling applies for the following periods

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commenced on

Pre 1985

Relevant facts

The company was incorporated and acquired land prior to 1985.

There were two shares issued and two shareholders.

After 1985 one of the shareholders died and left their share to the other shareholder.

The sole shareholder then died at a later date and left their shares to an individual beneficiary.

An examination of the financial statements of the Company from 19XX onwards has shown at least approximately fifty percent (50%) of the market value of the assets of the Company since that time (in some years potentially as high as 70%) has been constituted by the land acquired prior to 1985.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 149-10

Income Tax Assessment Act 1997 Section 149-15

Income Tax Assessment Act 1997 Section 149-30

Income Tax Assessment Act 1997 Subsection 149-10(3)

Income Tax Assessment Act 1997 Subsection 149-10(4)

Income Tax Assessment Act 1936 Division 20

Income Tax Assessment Act 1936 Section 160 ZZS

Reasons for decision

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; 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.

Essentially, a CGT asset acquired before 20 September1985 remains a pre-CGT asset if the majority underlying interests in the asset has not changed since 20 September 1985. Where a change in the majority underlying interests occurs the CGT asset is deemed to be acquired after 19 September 1985, under either Division 20 of the Income Tax Assessment Act 1936 (ITAA 1936) (pre 1998-99 income year) or Division 149 of the ITAA 1997.

The company's major asset was acquired prior to 1985.

The rulee is not a public company. Section 149-30 of the ITAA 1997 is the provision we need to consider.

Under section 149-30 of the ITAA 1997 an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985.

In other words, the Commissioner has to be satisfied that the majority underlying interests in the asset has not changed. Otherwise the asset is deemed to have been acquired at the time that the change in the majority underlying interest in the asset happened.

Majority underlying interests' is defined in section 149-15 of the ITAA 1997 as more than 50% of:

(a) the beneficial interests that 'ultimate owners' hold (whether directly or indirectly) in the asset; and

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

The expression 'beneficial interests' as used in the definition of majority underlying interests is not defined. In general law, a shareholder does not have any legal or equitable interest in the assets of a company. Thus, it would be difficult to see how an asset of a company can satisfy the majority underlying interests test and remain a pre-CGT asset.

Assistance is provided in Income Tax Ruling IT 2340 where the terms 'underlying interest' and 'majority underlying interest' and section 160ZZS of the ITAA 1936 are discussed.

IT 2340 states:

'2. The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets [emphasis added].

Applying the 'look through' approach, a shareholder is treated as having a beneficial interest in the company's assets. This approach is supported by the tribunal case AAT case 7529 (1991) 22 ATR 3532, Case Y59 91 ATC 502.

In this case, the shareholders of the rulee company, natural persons, are treated as having beneficial interests in the assets of the rulee and would be the 'ultimate owners' of the assets. These interests, in the assets and in income derived from the assets, are represented by the shareholdings.

Pursuant to subsections 149-30(3) and 149-30(4) of the ITAA 1997, a new owner will stand in the shoes of a former owner and will be deemed to have held the relevant interests during the time that the former owner owned them where the underlying interests in a pre-CGT asset are acquired by a new owner upon the death of a person.

The facts in this case shows that there were two changes due to death and the majority ownership has passed through these individuals to the next so that there has not been a change in the pre-CGT status of the asset as the majority underlying interest in the original parcel of land has not changed in a way that would invoke section 149-30 of the ITAA 1997. There has always been a share of at least two thirds held by the ultimate beneficiary.