Edited version of private advice

Authorisation Number: 1051696919017

Date of advice: 10 July 2020

Ruling

Subject:Pre capital gains tax property

Question 1

Would the Commissioner be satisfied or find it reasonable to assume that, for the purposes of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997), the majority underlying interests held in the pre-CGT assets of the company have been maintained?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2019

The scheme commences on:

01 July 2002

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The taxpayer is a company and was incorporated prior to 1985

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

On 19 September 1985, the taxpayer's shareholders were all members of a family group

The shareholders remain members of that same family group.

At 19 September 1985, the taxpayer's shareholders and their attributable shareholdings were:

As the first change, shareholder 4 passed away and left, by way of Will, this shareholding to shareholder 5. Accordingly, shareholder 5's attributable shareholding became 1,000 shares amounting to a 20% interest in the taxpayer.

As the second change, four of the remaining family group shareholders 6, 7, 8 and 9 were bought out by other family group shareholders, 1, 2, 3 and 5.

Immediately after this, the taxpayer's shareholders and their attributable shareholdings were:

As the third change, a share buy back occurred, which resulted in shareholder 10 having all interests bought back by the taxpayer and a portion of shareholders 1, 2 and 3's shares being bought back. The resultant shareholding in the taxpayer were:

As the fourth change, shareholder 5 passed away, and by way of Will, left the shareholding to shareholders 1, 2 and 3. From this date, the shareholding in the taxpayer remains as:

The shares held by shareholders 1, 2, 3, 4 and 5 were class B shares and those held by shareholders 6, 7, 8, 9 and 10 were class A shares.

Both the Class A and Class B shares were ordinary shares which conferred the same rights.

The taxpayer disposed of the property in the 2019 income tax year.

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

Detailed reasoning

Question 1

Would the Commissioner be satisfied or find it reasonable to assume that, for the purposes of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997), the majority underlying interests held in the pre-CGT assets of the company have been maintained?

Detailed reasoning

Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) determines when an asset acquired before 20 September 1985 stops being a pre-CGT asset.

In accordance with subsection 149-30(1) of the ITAA 1997, an asset will stop being a pre-CGT asset at the earliest time when majority underlying interests in the asset are not held by the same ultimate owners who had majority underlying interests before 20 September 1985.

Alternatively, 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 day, majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day, subsection 149-30(2) of the ITAA 1997 would apply as if that were in fact the case, so that the assets would retain their pre-CGT asset status.

In this case, the company had ten shareholders with different classes of shares prior to 19 September 1985. Shareholder 1,2,3 and 5 held exactly 50% interest at this time (attributing Shareholder 4's shares to Shareholder 5).

At the third change, Shareholder 1,2,3 and 5 acquired the balance of shareholdings, via a share by back. At the fourth change by Will, shareholder 5 bequeathed the ownership of their shares to shareholder 1,2 and 3.

This has resulted in shareholder 1,2 and 3 obtaining full ownership in the company.

Majority underlying interests in the assets of the company held by ultimate owners has significantly changed. The same shareholders do not continue to maintain ownership throughout the period.

Shareholdings were altered at the third change for shareholders 1,2, 3 and 4's benefit to obtain full beneficial ownership of the asset. Although the share dealings were made within the family group and partly with intentions of 'succession planning' this does not give reason for the Commissioner to make the reasonable assumption that ultimate ownership is maintained.

Based on this information, the Commissioner is not satisfied nor thinks it's reasonable to assume that at all times on and after 20 September 1985, the majority underlying interests in the assets of the company were had by ultimate owners who had majority underlying interests in the assets immediately before that day.