Edited version of private advice

Authorisation Number: 1051599524372

Date of advice: 12 November 2019

Ruling

Subject: Pre-capital gains tax property

Question 1

Was the property still a pre-capital gains tax (CGT) asset when the taxpayer sold it?

Answer

Yes. Having considered the circumstances and the relevant factors the Commissioner considers that the taxpayer has maintained the majority underlying interest in a pre-CGT asset. Further information can be found by searching 'ATO ID 2011/107' on ato.gov.au

Question 2

Can the taxpayer amend the 20XX Income Tax Return if this ruling is issued after the two year amendment period has ended?

Answer

Yes. Having considered the circumstances and the relevant factors the Commissioner will allow an amendment if this ruling issues outside of the limited amendment period.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The taxpayer is a company and was incorporated prior to 1985.

The taxpayer acquired land (the property) and other assets prior to 1985.

The taxpayer issued new ordinary shares to existing shareholders after September 1985

Shareholder 3 passed after September 1985 and the shares were distributed under the will

After shareholder 3 passed away, there was a family share settlement that resulted in the following

The taxpayer disposed of the property

The taxpayer lodged an income tax return that included a capital gain from the sale of the property. Accordingly, the nominal amendment period ends two years after the lodgement date.

The taxpayer has requested this private ruling prior to the ending of the amending period.

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 1936 Subsection 170(6)

Reasons for decision

Question 1

The property was still a pre-CGT asset when the taxpayer sold it.

Detailed reasoning

The taxpayer originally acquired the property before 20 September 1985 making it a pre-CGT asset for capital gains purposes.

Subsections 149-30(1) and 149-30(1A) of the Income Tax Assessment Act 1997 (ITAA 1997) provide that an asset stops being a pre-capital gains tax (CGT) asset at the earliest time when majority underlying interests in the asset were not held by the ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. This applies to the asset as if the entity had acquired the asset at the earliest date when majority underlying interest changed.

Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of:

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

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

Accordingly, ultimate owners who held majority underlying interests in an asset just before 20 September 1985 must retain such interests after that date, otherwise Division 149 of the ITAA 1997 will be triggered to convert the asset into a post-CGT asset.

In these cases, the asset is deemed to have a new date of acquisition (the date the majority underlying interest changed). Section 149-35 of the ITAA 1997 provides that the deemed first element acquisition costs for the purposes of determining the cost base (and reduced cost base), will be the market value of the asset at the time of change.

In this case, there were no significant changes in the underlying interests prior to the death of a shareholder. But that death re-set how the majority underlying interests are determined. Subsection 149-30(4) of the ITAA 1997 states:

This section applies as if the new owner had (in addition to any other underlying interests), at any time when the former owner had a percentage (the former owner's percentage) of the underlying interests in the asset, a percentage of the underlying interests in the asset equal to the acquired percentage, or the former owner's percentage at that time, whichever is the less.

As a result of the inheritance, the total ownership of ordinary shares held by Shareholder one and shareholder two became just over 50%.

Shareholder one and shareholder two later acquired all of the other shares and therefore all of the other underlying interests in the property.

This analysis confirms that Shareholder one and two have always held majority underlying interests in the property as they always held at least 25% of the shares before the death of a shareholder who always held at least 50% of the shares while he was alive and Shareholder one and two inherited 50% of the deceased's underlying interest in the property.

Consequently, the majority underlying interests in the property did not change after 20 September 1985 and the Division 149 acquisition conversion provision is not triggered.

Therefore, the property was still a pre-CGT asset when the taxpayer sold it.

Summary

Question 2

The taxpayer can amend the 2017 income tax return if this ruling is issued after the two year amendment period has ended.

Detailed reasoning

Item 2 of the Table in subsection 170(1) of the Income Tax Assessment Act 1936 (ITAA 1936) limits the amendment period for a company that is a small business entity to two years after the day on which the Commissioner gives notice of the assessment to the company.

By section 166A of the ITAA 1936, the Commissioner is deemed to have made the assessment on the day the company lodged the return.

That mean that ordinarily the amendment period would end two years after the company return was lodged. Here, that would be 17 August 2019.

However, subsection 170(6) of the ITAA 1936 authorises a longer amendment period if:

·         the taxpayer applies for a private ruling before the end of the limited amendment period, and

·         the Commissioner makes a private ruling because of that application.

The taxpayer's situation meets the conditions for the longer amendment period.