Edited version of your written advice

Authorisation Number: 1051512536089

Date of advice: 07 May 2019

Ruling

Subject: Majority Underlying Interest

Question

Has there been a change in the “majority underlying interest” since 20 September 1985 in the assets held by Company A Pty Ltd for the purposes of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) such that the assets are no longer pre-CGT assets?

Answer

No

This ruling applies for the following period(s)

Income years ended 30 June 2018 to 30 June 2021

The scheme commences on

19 September 19XX

Relevant facts and circumstances

Company A Pty Ltd (Company A) is an Australian private company that was established sometime before 1985.

Company A owns real property, acquired before 20 September 1985.

The shareholders of Company A are contemplating a divestment of the assets, likely to occur within the next few years.

The shareholding history of Company A that is relevant for this ruling is for the period 20 September 19XX to 30 June 20XX.

As at 19 September 19XX, Company A had X number of ordinary shares on issue, held as follows:

Some very minor changes in shareholdings happened in the years between 19XX and 19XX. These details have been provided to the Commissioner, and none of these affected the majority underlying interests of the relevant shareholders at any point in time.

At 30 June 19XX the new shareholdings were:

The applicant is unable to provide details of any changes in respect of both Company B Pty Ltd and Company C Pty Ltd shareholdings, but has provided the following information about other changes:

In the year ended 30 June 19YY, Person E’s shares were transferred to Persons C and D pursuant to Person E’s will.

In the year ended 30 June 20YX, Person A’s shares were transferred to Person F and another minor shareholder.

In the year ended 30 June 20YY, all of Person A’s shares which were inherited by the other minor shareholder were transferred to Person F pursuant to a will.

In the year ended 30 June 20YY, Person C’s shares (which include those inherited from Person E) were transferred to that person’s Estate, pursuant to a will. The beneficiaries of the estate are that person’s spouse and children.

In the year ended 30 June 20YY, a small number of shares were transferred from the Estate to the children. The Estate has not yet been fully administered.

Relevant legislative provisions

Division 149 of the Income Tax Assessment Act 1997

Subsection 149-30(3) of the Income Tax Assessment Act 1997

Subsection 149-30(4) of the Income Tax Assessment Act 1997

Reasons for decision

Summary

There has not been a change in the majority underlying interest since 20 September 1985 in the assets held by Company A Pty Ltd for the purposes of Division 149 of the ITAA 1997.

Detailed reasoning

Division 149 of the ITAA 1997 contains the provisions under which an asset acquired before 20 September 1985 is treated as having been acquired after that date, that is, the asset stops being a pre-CGT asset.

A factual test is used to determine when an asset of a non-public entity stops being a pre-CGT asset. Under the test, an asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not held by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985 (‘the factual test’).

The ‘majority underlying interests’ in a CGT asset consist of more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and any ordinary income that may be derived from the asset.

In this instance, it can be seen that the four top individual shareholders between them held 66.94% of the company as at 19 September 19XX:

● Person A – 22.12%

● Person B – 17.96%

● Person C – 13.43%

● Person D – 13.43%

Each of these shareholdings and any changes to the holding will now be discussed:

1. Person A’s shares transferred to Person F and another minor shareholder pursuant to the will. Person A’s shares held by the other minor shareholder were later transferred to Person F pursuant to a will.

Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner because of the death of a person (former owner), the 'new owner' is treated as having held the underlying interest of the 'former owner' for the period the 'former owner' held them.

This means that Person F, as the new owner of Person A’s shares, is deemed to have held them for the same time as Person A did. Hence, Person F is deemed to have held 22.12% of Company A’s shares since prior to 20 September 1985, in addition to their own personal original holding of 0.43%.

2. As at 30 June 20XX, Person B still held 17.9% of the shares in Company A.

3. Person C’s shares have been transferred pursuant to the Estate as a result of that person’s death, as outlined in the facts above. It is noted that prior to Person C’s death, they also inherited half of Person E’s shares.

As at 30 June 20XX, Person C’s Estate had not been fully administered.

ATO Interpretative Decision ATO ID 2003/779 Income Tax CGT: majority underlying ownership and deceased estate – continuity of interest during the period of administration states:

There is a period prior to the completion of the administration of the estate, during which beneficiaries are not considered to be presently entitled to the income of a deceased estate. Income of a deceased estate derived prior to the completion of the administration of the estate, is treated as the income of the legal personal representative (LPR) and is not income of the beneficiaries (paragraph 9 of Taxation Ruling IT 2622).

……

To give subsections 149-30(3) and 149-30(4) of the ITAA 1997 their intended effect, it is necessary to apply subsection 149-30(1) of the ITAA 1997 as if the beneficiary had beneficial interests in the assets of the estate from the date of the deceased person's death until the time the estate had been fully administered. Subsections 149-30(3) and 149-30(4) could never achieve their purpose if the period of administration were treated as a period when no one had any beneficial interests.

Practically, this means that Person C’s beneficiaries of his will, being the spouse and children, are deemed to have held Person C’s shares for the same period of time which they held them. They will also be deemed to have held them for that period of time once the Estate has been administered and they actually have ownership of the shares.

Thus, they are considered to have together held 13.43% of the shares in Company A since pre-20 September 1985, plus the additional shares Person C had inherited from Person E.

4. Person D has continued to hold 13.44% of shares in Company A, as well as acquiring the additional shares from Person E pursuant to a will.

It can be seen from the above, that the four largest individual shareholders as at 19 September 19XX either still hold their shares, or the beneficiaries of their Estates are deemed to have held the shares for the period of time the former owners held them, as a result of subsections 149-30(3) and 149-30(4) of the ITAA 1997.

On the facts, there has been continuous ownership of more than 50% of the beneficial interests in Company A since 19 September 19XX until 30 June 20XX. Therefore, there has not been a change in the majority underlying interest in Company A.