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Edited version of your written advice
Authorisation Number: 1051361741021
Date of advice: 18 April 2018
Ruling
Subject: Pre-capital gains tax asset exemptions
Question
Have the majority underlying interests in the pre-capital gains tax (CGT) assets of XYZ Company Pty Ltd changed since immediately before 20 September 1985 such that section 149-30 of the Income Tax Assessment Act 1997 (ITAA 1997) will stop the asset from being a pre-CGT asset?
Answer
No.
This ruling applies for the following periods:
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
The scheme commences on:
1 July 2017
Relevant facts and circumstances
XYZ Company Ltd Pty has interest in pre-CGT assets.
Immediately before 20 September 1985 the company had two shareholders who owned 50% of the shares each.
After 20 September 1985 XYZ Company Pty Ltd issued more shares to those shareholders and no other new shareholders.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 149
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 section 149-30
Income Tax Assessment Act 1997 subsection 149-30(1)
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
All legislative references are to ITAA 1997, unless stated otherwise.
Division 149 contains the rules stipulating when an asset stops being a pre-CGT asset.
Section 149-10 defines what is meant by a pre-CGT asset:
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.’
Subsection 149-30(1) provides that an 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) states that if the Commissioner is satisfied, or thinks it is 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 assets immediately before that day, subsection 1 applies as if that were in fact the case.
Subsection 149-15(1) provides that the majority underlying interests in a CGT asset consist of:
(a) more than 50% of the beneficial interests 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(3) provides that an ultimate owner can be an individual.
Subsection 149-15(4) provides that 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 the other entity were to distribute any of its capital and the capital were then successfully distributed by each entity interposed between the other entity and the ultimate owner.
Application to your circumstances
Immediately before 20 September 1985, 100% of the underlying interests in the company was owned by two shareholders. The company has only issued ordinary shares, therefore all the shares owned by the various shareholders carry the same rights. After CGT, they still own 100% of the underlying interests. The number of shares they own have just been increased.
Therefore the Commissioner is satisfied that the majority underlying interest in the company assets has been maintained in accordance with section 149-30.
The assets will retain their pre-CGT status.