Edited version of your written advice

Authorisation Number: 1051388241893

Date of advice: 21 June 2018

Ruling

Subject: Pre-CGT status of units in trust

Question

Are the units held by Trust A and Trust B in Trust C pre-CGT assets on the date of the sale of the Business?

Answer

Yes

This ruling applies for the following period

Year ending 30 June 201Z

The scheme commences on:

201Z

Relevant facts and circumstances

Company A (Current Trustee) is a trustee of Trust C.

Trust C was established in mid-198X by Taxpayer A as founder and Company B as trustee.

Company B was registered on in mid-198X and acted as the trustee of Trust C until around 199Y, when the trustee of Trust C was changed to the Current Trustee.

Since 198X and until the sale completion date in mid 201Z, the Trust C operated a business that provided infrastructure and marketing to support drivers in providing transportation services to individuals and small groups of individuals (the Business).

Upon its establishment a total of XX units in Trust C were issued to the following subscribers:

● BB units were issued to Company C as trustee for the Trust B

● BB units were issued to Company D as trustee for the Trust D.

The beneficiaries of Trust D were each entitled to BB units (50% interest in the relevant trust) and were originally:

● Company E as trustee of the Taxpayer B; and

● Taxpayer C.

On or about 30 June 198W, Company E transferred its BB units in Trust D to Company F as trustee for Trust A

Company E as trustee of Taxpayer B was the sole unitholder of Trust A.

As a result, Trust A and Taxpayer C were each entitled to BB units (50% interest) in Trust D.

As a result of this arrangement, the ownership of Trust C before 30 June 1985 can be illustrated as follows:

On July 1985, Trust D merged its assets and liabilities with Trust C (the Merger) and continued to operate solely under Trust C.

As a result of the Merger, the following unitholders became entitled to 33.3% interest in Trust C:

● Company G as trustee for the Ford FT;

● Company F as trustee for the Trust A; and

● Taxpayer C.

Prior to the Merger, the original unitholders of Trust C (Trust D and Trust B) each held BB units in the relevant unit trust. After the Merger, each of them held 33.3% interest in Trust C.

For this period no documentation could be found as to how the split of ownership occurred, the only two possibilities are: either a further BB new units were issued in Trust C, so each unitholder could be allocated BB units (33.3% interest), or the original XX units had their rights varied, so each unitholder could hold 33.3% interest in Trust C.

The ownership of Trust C in mid-198Y can be illustrated as follows:

On a day between 30 December 198U and 30 December 198V, Taxpayer D ceased to be a shareholder of Company B.

In mid-198V, Taxpayer D resigned as director of Company B.

Taxpayer C ceased to be a unitholder of Trust C on or about 30 June 198V. This date coincides with the approximate date on which Taxpayer D resigned as a director of Company B and Taxpayer E and Trust A was each allotted one ordinary share in Company B as outlined below.

On a day between 30 December 198T and 30 December 198V, an ordinary share was allotted to Taxpayer E, increasing its shareholding in Company B from 1 to 2 ordinary shares.

In mid-198V, an ordinary share was allotted to Trust A, increasing its shareholding in Company B from 1 to 2 ordinary shares.

As of early 201Z, Company F and Taxpayer E each held two ordinary shares in Company B (i.e. each hold 50% interest in the company). The trust variation had the consent of all unitholders of Trust C, being at that date Trust A and Trust B.

As of early 201Z, Trust A and Trust B remain the unitholders of Trust C and each held 50% interest in the relevant unit trust.

After the resignation of Taxpayer D and Taxpayer C ceasing to be a unitholder, the ownership of Trust C to this date can be illustrated as follows:

There was no significant change in the majority underlying ownership of relevant trusts from 199A to the present.

Assumptions

From September 198B to 199A, no significant changes in beneficiaries have occurred in the relevant trusts.

A further BB units were issued in the Trust C as at 1 July 1985 so that each unit holder could hold BB units each and have exactly 33.33% ownership.

Relevant legislative provisions

Section 149-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997)

Reasons for decision

These reasons for decision accompany the Notice of private ruling for Company F ATF Trust A and Company G ATF Trust B.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

We are satisfied that no significant change has occurred in the majority underlying ownership of any of the relevant trusts up to the date of sale of the business. As such, the units held by Trust A and Trust B in Trust C are considered pre-CGT assets on the date of the sale of the business.

Detailed reasoning

Subsection 149-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and Taxation Ruling IT 2340 Income tax: capital gains: deemed acquisitions 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 (IT 2340) provide guidance when a CGT asset loses its pre-CGT status. They apply when a taxpayer has acquired assets prior to 20 September 1985 and on or after that date there is a change of 50 per cent or more in the majority underlying ownership of the assets.

Subsection 149-30(1) states that:

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.

IT 2340 further elaborates that where such a change occurs the provision operates to deem the assets to have been acquired after 19 September 1985 so that any subsequent real capital gain on the assets will fall within the tax base. Paragraph 2 of IT 2340 also states that 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.

Where within those chains of entities there is a discretionary trusts, IT 2340 states¹:

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.

To maintain the pre-CGT status of your asset, under subsection 149-30(1) of the ITAA 1997 and IT 2340, there must not be a significant change in the majority underlying ownership of the asset since the pre-CGT date. In your case, since there were no significant changes in the beneficiaries, even when look through the chain of entities to the family trusts, the Commissioner does find it reasonable to assume that for all practical purposes that there has not been a change in majority underlying interests of the trust. Therefore subsection 149-30(1) of the ITAA 1997 does not apply and the units held will retain their pre-CGT status.