Edited version of your written advice

Authorisation Number: 1051390069536

Date of advice: 6 July 2018

Ruling

Subject: CGT – acquisition date – change in majority underlying interests

Question

Is the Commissioner satisfied, or consider it reasonable to assume for the purposes of subsection 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997) that, at all times on and after 19 September 1985 and before the date of issue of this ruling, majority underlying interest in the Property were held by ultimate owners who, immediately before 20 September 1985, held majority underlying interests in it?

Answer

Yes.

This ruling applies for the following period:

20xx-xx income year

The scheme commences on:

1 July 19xx

Relevant facts and circumstances

The Company Pty Ltd (the Company) was incorporated some 40 years ago by the late ABC and the late DEF.

It was at this time that the Property was transferred into the Company at its then market value.

The Property was then leased back to KDF and DEF for use in their business. This business was later continued by their child GHI and the child’s spouse JKL.

Historically, the Company has had up to three shareholders – ABC, DEF and GHI.

Chronology of key dates and events

Time 1

Incorporation of the Company

ABC issued with half of the issued C class shares as subscriber

DEF issued with half of the issued C class shares as subscriber

Property transferred to the Company on or around this date

Time 2

Director’s meeting

GHI issued with an equal number of C class shares

ABC appointed as a director

DEF appointed as a director and company secretary

GHI appointed as a director

Time 3

Director’s meeting

ABC issued with one third of the issued A class shares

DEF issued with one third of the issued A class shares

GHI issued with one third of the issued A class shares

20 September 1985 – Capital gains provisions commenced

Time 4

Director’s meeting

GHI issued with redeemable preference shares

DEF ceased as company secretary

GHI appointed company secretary

Time 5

ABC died

A class shares convert to A class preference shares

ABC ceased as a director

Time 6

Director’s meeting

All shares owned by DEF transferred to GHI

DEF ceased as director

JKL appointed as a director

Time 7

DEF died

redeemable preference shares held by GHI became D class shares

The Company constitution establishes the share structure creating a number of different classes of shares with different rights and powers attaching to the different classes with variability related to the death of ABC and DEF (except for the C class share whose rights don’t change).

The original share capital of the Company is described in the constitution as shares of $1 each, of which some shall be issued as A class shares, some shall be issued as B class shares, some issued as C class shares, some redeemable preference shares and the remainder shall be held in reserve.

During the lifetime of ABC, the A class shares conferred upon the holders the right to vote at all and any general meetings of the Company and the right to receive and/or participate whether by way of dividend reduction of capital or otherwise in the distribution of any amount paid as a premium on any shares subscribed for in the Company and the right to dividends declared out of profits of the Company.

Upon the death of ABC, the A class shares became A class preference shares which conferred upon the holders the right to receive a fixed non-cumulative preference dividend at the rate of 8% per annum on the amount paid up thereon and to receive on winding up of the Company the amount paid up on such shares in priority to all other shareholders apart from the holders of B class preference shares who shall rank equally therewith but no further right to participate in other assets of the Company and the right to receive notice of and to attend general meetings of the Company but not the right to vote thereat where at the date of the meeting the dividend thereon has been in arrears for more than three months or upon a resolution for winding up the Company or altering the rights attaching to the A class preference shares.

There is no record of any B class shares ever being issued. However, their rights are similar to the A class shares and were to convert to B class preference shares (with similar rights to the A class preference shares) upon the death of DEF.

The C class shares conferred upon the holders the right to vote at all and any general meetings of the Company and to receive dividends declared out of profits of the Company and to receive on winding up of the Company the amount paid up on such shares subject to the rights of holders of the other shares ranking in priority to the C class shares but no further right to participate in other assets or profits of the Company.

During the lifetime of ABC and DEF (or the survivor of them), the redeemable preference shares conferred upon the holders the right to receive such dividend (if any) as the Company in general meeting may determine without priority over any other class of shareholders and to receive on winding up of the Company the amount paid up on such shares in priority over any other class of shareholders apart from the holders of any A class preference shares or B class preference shares who shall rank in priority thereto but no further right to participate in the other assets or profits of the Company. The holder of the redeemable preference shares shall be entitled to receive notice of and to attend general meetings of the Company but shall not have the right to vote thereat except where the business of the meeting includes the consideration of a resolution for reducing the capital of or for the sale of the undertaking of the Company or the winding up of the Company.

Upon the death of the survivor of ABC and DEF, the redeemable preference shares became D class shares which conferred upon the holder the right to vote at all general meetings of the Company and the right to all dividends declared by the Company and the right to receive proportionately between them all surplus assets of the Company on a winding up after providing for repayment of capital on the A class preference shares and B class preference shares and the costs and expenses of winding up.

The constitution entitled the Company in general meeting at any time before the death of the survivor of ABC and DEF to redeem the whole or part of the redeemable preference shares on issue for $1.

The constitution also states that ‘without prejudice to any special rights previously conferred on the holders of any shares or class of shares all unissued shares in the original capital of the Company and any new shares from time to time created shall be under the control of the Directors who may allot grant options over or otherwise deal with such preferred deferred or other special rights or such restrictions whether in regard to dividend voting or return of share capital and either at a premium or otherwise and at such time or times as the Directors may think fit but so that the Company shall not cease to be an exempt proprietary company.’

Recap – Shareholding in Company as at 20 September 1985

A class shares

ABC held one third of the shares of this class

DEF held one third of the shares of this class

GHI held one third of the shares of this class

Has a right to any surplus on wind up of Company

C class shares

ABC held one third of the shares of this class

DEF held one third of the shares of this class

GHI held one third of the shares of this class

Has no right to any surplus on wind up of Company

Recap – Current shareholding in Company

A class preference shares – total held by GHI

one third of these shares issued before 1985

one third of these shares acquired by will on death of ABC

one third of these shares acquired by transfer from DEF

Has no right to any surplus on wind up of Company

C class shares – total held by GHI

one third of these shares issued before 1985

one third of these shares acquired by will on death of ABC

one third of these shares acquired by transfer from DEF

Has no right to any surplus on wind up of Company

D class shares – total held by GHI

Issued after 1985

Has a right to any surplus on wind up of Company

Assumption

For the purpose of this ruling, it is assumed that a CGT event will happen to the Property during the 20xx-xx income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 Subsection 149-30(2)

Reasons for decision

Summary

The Commissioner is satisfied, or considers it reasonable to assume for the purposes of subsection 149-30(2) of the ITAA 1997 that, at all times on and after 19 September 1985 and before the date of issue of this ruling, majority underlying interest in the Property were held by ultimate owners who, immediately before 20 September 1985, held majority underlying interests in it.

Detailed reasoning

Division 149 of the ITAA 1997 contains provisions which govern when an asset of an entity stops being a pre-CGT asset and is treated as having been acquired after 20 September 1985.

An asset stops being a pre-CGT asset when majority underlying interests in the asset were not held by the same ultimate owners who held those interests in the asset immediately before 20 September 1985 (subsection 149-30(1) ITAA 1997).

In that case, the CGT provisions apply to the asset as if:

● the entity had acquired it at the time when the continuity of majority underlying interests ceased; and

● the first element of the cost base and reduced cost base of the asset is its market value at that time (subsection 149-30(1) and section 149-35 ITAA 1997).

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 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-CGT asset (subsection 149-30(2) ITAA 1997).

Application to this situation

As at 20 September 1985, majority underlying interests in the Property were held by ABC, DEF and GHI jointly or by any two of them together. None of these shareholders held a majority underlying interest in the Property by themselves alone.

The shares owned by ABC passed to GHI at Time 5. The ultimate owner status attached to these shares also passed to GHI. DEF did not own any shares in the Company when DEF passed away so the test is not re-set due to this death.

So, for the purpose of determining if there has been a change in majority underlying interests in the Property:

For the period 20 September 1985 to Time 5, the majority underlying interest holders of the Property just before 20 September 1985 were ABC, DEF and GHI jointly or any two of them together, and

For the period from Time 5 to the present, the majority underlying interest holders in the Property just before 20 September 1985 was GHI alone or DEF and GHI jointly.

Between 20 September 1985 and Time 4, there was no change in share ownership so there was no change to majority underlying interests.

At Time 4, redeemable preference shares (that later became D class shares) were issued to GHI. This act shared the Company’s dividends among those additional shares but didn’t alter the right to the beneficial interest in the Property. So there was no change to majority underlying interests.

At Time 5, the A class shares became A class preference share and all of the shares were held by DEF and GHI. The Company’s constitution provided that only the B class shares were entitled to the capital, but no B class shares had been issued.

The New South Wales Supreme Court have considered a matter similar to this in Yanollee Pty Limited (In Liq) [2006] NSWSC 705 when applying section 501 of the Corporations Act 2001 to this liquidation and concluded that the surplus should be distributed ‘by division among the members in proportion to the capital paid up on their shares at the commencement of the winding up’.

Applying this decision to this situation would mean that from Time 5, the majority underlying interests are held by GHI alone or DEF and GHI jointly and there was no change to majority underlying interests.

At Time 6, GHI became the owner of all the shares and therefore the majority underlying interest holder of the Property. But GHI was a majority underlying interest holder just before 20 September 1985 for the purpose of this test at this time and so there was no change to majority underlying interests.

At Time 7, the single redeemable preference share became a D class share but there was no ownership change to any shares so there was no change to majority underlying interests in the Property.

For the absence of doubt, the Commissioner is satisfied that, at all times on and after 20 September 1985 and before the date of issue of this ruling, majority underlying interests in the Property were held by the same ultimate owners who held majority underlying interests in it immediately before 20 September 1985.

Consequences of this conclusion

The consequence of the Commissioner being satisfied of the above is that majority underlying interests in the Property are considered to be held by the same ultimate owners who held those interests immediately before 20 September 1985 at least until the date of issue of this private ruling.

Therefore, the Property remains a pre-CGT asset as at the date of issue of this private ruling.