Edited version of private advice

Authorisation Number: 1051601941489

Date of advice: 8 November 2019

Ruling

Subject: Application of Subdivision 149-C

Question 1

Is the Commissioner satisfied that, at the end of the relevant dates, majority underlying interests in D Co's goodwill were held by ultimate owners who also had majority underlying interests in the goodwill as at 19 September 1985?

Answer

Yes.

This ruling applies for the following period:

1/7/20XX to 30/6/20XX

The scheme commences on:

XX/XX/20XX

Relevant facts and circumstances

1.     D Co was established prior to September 1985 and the original capital comprised of 1 A class share and 1 B class issued to 2 minority shareholders.

2.     In 19XX, additional A and B class shares were issued to other shareholders who have continued to own shares in D Co (hereinafter are collectively referred to as the controlling shareholders).

3.     As at 19 September 1985, the controlling shareholders held all of the issued shares in D Co except the 2 shares held by the minority shareholders.

4.     D Co issued further A and B class shares to the controlling shareholders and 2 shares held by the minority shareholders have been bought back.

5.     All issued A class and B class shares were converted into a single class of ordinary shares and subsequently split into x million shares. The share split did not affect the income and capital rights of these shares.

6.     In 20XX, D Co issued x million ordinary shares to various new investors. D Co was officially listed on the Australian Securities Exchange (ASX).

7.     The controlling shareholders held majority of shares in D Co.

8.     D Co also issued new shares to third parties following the exercise of options.

9.     In 20XX, D Co introduced a dividend reinvestment plan (DRP). The DRP shares issued thereto have been converted into ordinary shares in D Co.

10.  On X1/XX/20XX, the controlling shareholders sold x million shares on market.

11.  On X2/XX/20XX, x million shares were issued to third parties pursuant to a placement, which increased the shares owned by the third parties to XX.XX%.

12.  On X3/XX/20XX, D Co issued additional x million shares to third parties pursuant to a placement. This increased the number of shares held by the third parties to XX.XX%. The controlling shareholders collectively owned more than 50% of D Co at the end of X3/XX/20XX.

13.  During the intervening years, Co share movement should be considered as in the ordinary course of business and is not otherwise abnormal.

14.  At the end of X3/XX/20XX, the controlling shareholders collectively owned more than 50% of D Co.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 149-C

Income Tax Assessment Act 1997 Section 149-50

Income Tax Assessment Act 1997 Subsection 149-50(1)

Income Tax Assessment Act 1997 Section 149-55

Income Tax Assessment Act 1997 Subsection 149-55(2)

Income Tax Assessment Act 1997 Subsection 149-55(6)

Income Tax Assessment Act 1997 Subsection 149-55(7)

Income Tax Assessment Act 1997 Section 149-60

Income Tax Assessment Act 1997 Subsection 149-60(1)

Income Tax Assessment Act 1997 Section 149-70

Income Tax Assessment Act 1997 Subdivision 960-H

Income Tax Assessment Act 1997 Section 960-220

Income Tax Assessment Act 1997 Section 960-225

Income Tax Assessment Act 1997 Subsection 960-225(1)

Income Tax Assessment Act 1997 Subsection 960-235

Income Tax Assessment Act 1997 Subsection 995-1

Unless otherwise stated, all legislative references in this ruling are to the Income Tax Assessment Act 1997 (ITAA 1997)

Reasons for decision

Detailed reasoning

Subdivision 149-C applies to the pre-CGT assets of a company whose shares are listed for quotation in the official list of an approved stock exchange (paragraph 149-50(1)(a)). As D Co has been listed on the ASX, it is subject to Subdivision 149-C.

Within six months after each test day, an entity to which Subdivision 149-C applies must give the Commissioner written evidence about the majority underlying interests in the CGT asset at the end of that day, in a form that makes the information about those interests readily apparent (subsections 149-55(1) and (1A)).

D Co was established before 1985 and the only asset owned by D Co on 19 September 1985 and still owned by D Co is the goodwill of the business.

Section 149-70 states that an asset stops being a pre-CGT asset if the condition in subsection 149-60(1) is not satisfied. Subsection 149-60(1) states that:

"On the basis solely of the evidence given to the Commissioner under subsection 149-55(1), the Commissioner must be satisfied that, or think it reasonable to assume that, at the end of the *test day, *majority underlying interests in the asset were had by *controlling shareholders who also had *majority underlying interests at the end of the starting day. The starting day is: (a) a day the entity chooses under subsection (2); or (b) if no day is chosen - 19 September 1985."

As D Co has not chosen otherwise, the starting day for the purposes of subsection 149-60(1) is 19 September 1985.

Subdivision 149-C

Test day

A test day is defined in subsection 149-55(2) as:

(aa) 30 June 1999,

(a) a day that is 5 years (or a multiple of 5 years) after 30 June 1999 ...;

(b) if the entity is covered by paragraph 149-50(1)(a) or (e) - a day on which there is *abnormal trading in *shares in the company;

Section 995-1 states that abnormal trading has the meaning given by Subdivision 960-H.

Abnormal trading

Subsection 960-225(1) of Subdivision 960-H relevantly provides that there is abnormal trading if trading in the shares of a company is abnormal having regard to all relevant factors including:

(a)             the timing of the trading, when compared with the normal timing for trading in the company's shares;

(b)             the number of shares traded, when compared with the normal number of the company's shares or the units traded;

(c)             any connection between the trading and any other trading in the company's shares; and

(d)             any connection between the trading and a tax loss or other deduction of the company.

Subsection 960-225(1) of the ITAA 1936 applies tests comparing the actual trade in shares under consideration and the normal trade in shares. Subsection 960-225(1) also requires all of the listed factors to be considered to determine if there has been abnormal trading. Where one factor applies and other factors do not apply to offset that factor, that single factor may be the only relevant factor to be considered.

Subsections 149-55(6) and (7) change how Subdivision 960-H applies for determining whether there is abnormal trading in shares. Under subsections 149-55(6) an issue, redemption or transfer, or any other dealing, is a trading if, and only if, it changes the respective proportions in which controlling shareholders have underlying interests in the CGT assets of the company. Subsection 149-55(7) provides that the suspected transaction involving 5% or more of shares under section 960-235 is to be disregarded.

Disposal of shares by the controlling shareholders

The evidence provided indicates that on X1/XX/20XX, the controlling shareholders sold x million shares. The disposal of shares constitutes a trading in shares for the purposes of section 960-220.

When comparing the number of shares traded to the numbers of the shares independently owned by third parties that were available for trading on the market, it is considered that the number of shares traded is abnormal trading. Accordingly, X1/XX/20XX is a test day for D Co.

Issue of shares on X2XX/20XX

D Co issued new shares to various institutional, professional and sophisticated investors under a placement. The issue of D Co's shares constitutes a share trade as defined under subsection 960-220.

The issue of shares in D Co increased the shares held by independent parties and resulted in a reduction in the underlying interest that the controlling shareholders had in the company.

Consequently, the issue of x million shares on X2/XX/20XX is abnormal trading. Therefore, X2/XX/20XX is a test day for D Co.

Issue of shares on X3/XX/20XX

The issue of additional shares to third parties under a placement also constitutes a share trade pursuant to subsection 960-220.

The new issue of the shares increased the number of shares to the shares independently owned by third parties and the trade is also abnormal trading. Therefore, X3/XX/20XX is a test day for D Co.

D Co also acknowledged that each of the relevant dates is a test day for them. The evidence regarding the majority underlying interests was provided to the Commissioner within the 6 month period after each test day as required by subsection 149-55(1).

Change in majority underlying interests

The controlling shareholders owned majority of the shares on issue as at 19 September 1985. The controlling shareholders still owned more than 50% of the D Co shares on issue at the end of the relevant test dates.

During the intervening years the controlling shareholders did not reduce their combined ownership interests below 50% of the issued shares of D Co. Accordingly, it is established that the controlling shareholders who had majority underlying interests as at 19 September 1985 continued to have majority underlying interests at the end of the relevant test days.

Conclusion

On the evidence provided, the Commissioner is satisfied that, at the end of each of the test days (where applicable), the majority underlying interests in D Co's goodwill were held by the controlling shareholders who also had majority underlying interests in D Co's goodwill as at 19 September 1985.