Edited version of private advice

Authorisation Number: 1051735851034

Date of advice: 10 August 2020

Ruling

Subject: Pre-capital gains tax status

Question

Would the asset qualify as a pre-CGT asset, so that any capital gain or loss from sale of the asset by the taxpayer would be disregarded?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The unincorporated association was a registered charity. It acquired an assetbefore 20 September 1985.

A few years after 1985, the unincorporated association was incorporated under the Associations Incorporation Act 1981 (QLD).

Upon incorporation, the asset was vested into the incorporated association.

Governing documents of the unincorporated association and the incorporated association contain non-profit clause(s) and/or dissolution clause(s) that prohibit any distribution to the members.

In 20XX, the incorporated association was wound up and a liquidator was appointed.

Subsequently, the incorporated association ceased operation, and the asset was disposed by the liquidator.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

Reasons for decision

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Under section 149-10, a CGT asset that an entity owns is a pre-CGT asset if, and only if:

(a). the entity last acquired the asset before 20 September 1985; and

(b). the entity was not, immediately before the start of the 1998-99 income year, taken under:

(i).   former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA1936); or

(ii).  Subdivision C of Division 20 of former Part IIIA of that Act;

to have acquired the asset on or after 20 September 1985; and

(c). the asset has not stopped being a pre-CGT asset of the entity because of this Division.

In this case, the asset was acquired by the unincorporated association before 20 September 1985.

The former section 160ZZS of the ITAA 1936 applied to pre-CGT assets before commencement of the 1998-99 income year. It was rewritten into Subdivision 149-B, where in accordance with subsection 149-30(1), an asset of a non-public entity stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985, unless the Commissioner is satisfied, or thinks it reasonable to assume otherwise under subsection 149-30(2).

'Majority underlying interests' in a CGT asset, is defined in subsection 149-15(1) to consist of more than 50% of the beneficial interests held, directly or indirectly, in the asset and any income that may be derived from it.

An 'ultimate owner' includes a company whose constitution prevents it from making any distribution, whether in money, property or otherwise, to its members: subsection 149-15(3).

The definition of 'company' in section 995-1 includes both unincorporated association and incorporated association.

On the facts, the unincorporated association was a registered charity, its governing document prevented it from making any form of distribution to its members during its normal course of operation as well as upon dissolution.

Upon incorporation and registration of its incorporation, the incorporated association is prohibited from providing any financial gain to its members under the Associations Incorporation Act 1981 (QLD) as well as by its governing document.

The unincorporated association and the incorporated association are respectively considered as ultimate owners who had majority underlying interests in the asset under subsection 149-15(3).

To determine if the pre-CGT status of the is maintained, the key question is, whether the incorporated association is the same entity as the unincorporated association.

In the ATO Interpretive Decision ATO ID 2002/808 Income Tax Capital gains tax: conversion from unincorporated association to incorporated association under Associations Incorporation Act 1981 (Qld) (ATO ID 2002/808), the Commissioner considers if there is a change of ownership of the assets upon an unincorporated association converting into an incorporated association under the Associations Incorporation Act 1981 (Qld) (AIA (QLD)).

In the ATO ID 2002/808, unincorporated association and incorporation association are companies for income tax purpose, however, it does not make them the same 'company' for the purposes of the ITAA 1997.

ATO ID 2002/808 further refers to the legislation under which incorporation of the association is effected (the AIA (QLD)), which does not provide for the continuation of the same legal entity, but merely provides registration of the association and sets out the effects of incorporation. Therefore, the incorporated association is not the same entity as the unincorporated association, and there is a change in ownership of the assets upon incorporation.

Accordingly, in the present case, the incorporated association should not be considered as the same entity as the unincorporated association; the pre-CGT status of the asset stopped upon the incorporation, when the majority underlying interests in the asset started to be held by a different ultimate owner. Capital gain or loss (if any) from sale of the asset cannot be disregarded; capital gain tax is payable if any net capital gain is made upon the sale.