Edited version of private advice

Authorisation Number: 1051874016277

Date of advice: 23 July 2021

Ruling

Subject: CGT - tax treatment of property sale

Question 1

Would the profit from the sale of the Property be treated as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Would the profit from the sale of the Property be treated as statutory income under section 6-10 or section 15-15 of the ITAA 1997?

Answer

No

Question 3

Would the profit from the sale of the Property be treated as statutory income under the capital gains tax provisions in Part 3-1 of the ITAA 1997?

Answer

Yes, but the capital gain/loss from the proposed transaction is disregarded if the property retains its pre-CGT status.

Question 4

Would the Commissioner be satisfied for the purpose of Division 149 of the ITAA 1997, the majority underlying interests in the pre-CGT assets of the company have been maintained at the date of this ruling.

Answer

Yes

This ruling applies for the following period periods:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Background

The taxpayer and entity A are the registered owners as tenants in common of the Property.

On or about X XX 19XX, the taxpayer and other entities entered a contract to purchase the Property.

At the time of the purchase, the taxpayer and entity B were in partnership and jointly purchased half of the Property. Entity A purchased the other half.

On XX XX19XX, entity B transferred its interest in the property to the taxpayer.

The Property is predominately open grazing land.

There are multiple industrial buildings and infrastructure associated with the use of the land for abattoir/tallow/rendering meat industry related works.

The buildings on the land have been in use since 19XX and there have not been any improvements to the Property since 19XX.

The Property is subject to a lease to an unrelated party.

On XX XX 20XX, the taxpayer and entity A received a letter of offer from a third party to purchase the Property.

At the date of this ruling application, no contract of sale has been entered into in respect to any sale of the Property pursuant to the letter of offer.

The taxpayer

The taxpayer is a tax resident of Australia.

The taxpayer has never undertaken any business involving property development.

As at 19 September 19XX, the taxpayer had xx ordinary shares on issue. There were no other classes of shares on issue at that time.

The shares were held as follows:

There have been a number of changes to the shareholders in the taxpayer since 19 September 19XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Part 3-1

Income Tax Assessment Act 1997 - Part 3-3

Income Tax Assessment Act 1997 - section 6-5

Income Tax Assessment Act 1997 - section 6-10

Income Tax Assessment Act 1997 - section 15-15.

Income Tax Assessment Act 1997 - section 140-10

Income Tax Assessment Act 1997 - section 118-25

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 - former section 160ZZS

Income Tax Assessment Act 1996 - former section 160ZZRU

Reasons for decision

Question 1

Summary

The profit or gain made from the proposed sale of Property will not be profits in the ordinary course of business and therefore will not be assessable as ordinary income pursuant to section 6-5 of the ITAA.

Detailed reasoning:

The profits or gains made from the disposal of real property can be assessed for income tax purposes in a number ways, including:

•         Ordinary income under section 6-5 of the ITAA 1997, resulting from:

-                    carrying on a business; or

-                    an isolated or commercial transaction that was entered into with a profit-making intention; or

•         statutory income pursuant to the capital gains tax (CGT) provisions in Part 3-1 and 3-3 of the ITAA 1997 (section 6-10 of the ITAA 1997)

Profits or gains made in the ordinary course of business

Taxation Ruling TR 92/3- Income tax: whether profits on isolated transactions are income ('TR 92/3') sets out the Commissioner's view on the application of the principles established in Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199 ('Myer'). Paragraph 32 of TR 92/3 states that a profit or gain made in the ordinary course of a business includes:

•         a profit or gain arising from a transaction which is itself a part of the ordinary business of a taxpayer (judged by reference to the transactions in which the taxpayer usually engages); and

•         a profit or gain arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly in its main business activity.

In determining whether profits or gains made from the disposal of real property are made in the ordinary course of business, one must establish if a taxpayer is carrying on a business and what the nature of the business is.

The definition of 'business' for income tax purposes is wide and includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee (subsection 995-1(1) of the ITAA 1997).

The principles in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production ('TR 97/11') provide guidance on whether a taxpayer is carrying on a business and can be applied in various contexts. Specifically, paragraph 13 of TR 97/11 provides a list of indicators that are relevant in determining whether a taxpayer is carrying on a business. In general, the indicators are:

•         whether the activity has a significant commercial purpose or character;

•         whether the taxpayer has more than just an intention to engage in business;

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

•         whether there is repetition and regularity of the activity;

•         whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

•         the size, scale and permanency of the activity; and

•         whether the activity is better described as a hobby, a form of recreation or a sporting activity.

No one indicator is decisive but rather different indicators must be considered in combination and as a whole. So the question of whether a business is being carried on is determined in an objective manner based on the weighing up of all the relevant facts and circumstances of each case.

In relation to property or land development, Taxation Determination 92/124: Income Tax: property development: in what circumstances is land treated as trading stock ('TD 92/124') recognises that repetitive buying and selling of property is not necessary to establish that a business of property acquisition, development and sale is being carried on. If a 'definite and continuous cycle of operations' has been initiated, a business of property development has commenced.

Once it is established that there is a business, it then follows that the profits made in the ordinary course of carrying on that business constitute income. This principle has been discussed in many court cases, generally in the context of distinguishing between income and capital receipts. Californian Copper Syndicate (Limited & Reduced) v. Harris (1904) 5 T.C. 159 ('Californian Copper Syndicate') has been cited with authority in many Australian court cases as the leading case regarding these principles.(See for example, Westfield Limited v Commissioner of Taxation (1991) 28 FCR 333, Commissioner of Taxation (Cth) v Myer Emporium Ltd (1987) 163 CLR 199, London Australia Investment Company Limited v Federal Commissioner of Taxation 77 ATC 4398 and CMI Services Pty Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4428).

In Californian Copper Syndicate Lord Justice Clerk stated at 165-166 that:

It is quite a well-settled principle in dealing with questions of assessment to income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than that for which he originally acquired it, the enhanced price is not profit...But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.

...

What is the line which separates the two classes of cases it may be difficult to define, and each case must be considered according to its facts, the question to be determined being, is the sum of the gain that has been made a mere enhancement of value by realising a security, or is it a gain made by an operation of business in carrying out a scheme for profit-making.

In London Australia Investment Company Limited v Federal Commissioner of Taxation 77 ATC 4398 ('London Australia'), Gibbs J, in discussing the above principles, stated:

Their Honours [in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1945) 73 CLR 604] went on to point out that not all of the proceeds of a business carried on by a taxpayer are income for the purposes of the [Income Tax Assessment] Act; they will be so only if they are income 'in accordance with the ordinary usages and concepts of mankind, except in so far as the Act states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income' (see at p. 615). However it is in my opinion established by this and many other cases in which Californian Copper Syndicate v. Harris has been applied that if the sale in question is a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character. To apply this criterion it is necessary 'to make both a wide survey and an exact scrutiny of the taxpayer's activities': Western Goldmines N.L. v. C. of T. (W.A.) (1938) 59 C.L.R. 729 at p. 740.

Gibbs J also noted that the test in Californian Copper Syndicate is applicable to any business.

Similarly, in Myer, the High Court stated that:

Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income.

Isolated transaction with a profit-making intention

In some instances a profit or gain made from an isolated or commercial transaction could constitute ordinary income if the taxpayer's purpose or intention in entering into the transaction was to make a profit, notwithstanding that the transaction was not part of its daily business activities.

This was discussed in Myer, where the full bench of the High Court stated that:

But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as the result of an isolated venture or a "one-off" transaction preclude it from being properly characterized as income (F.C. of T. v. Whitfords Beach Pty. Ltd. 82 ATC 4031 at pp. 4036-4037, 4042; (1982) 150 C.L.R. 355 at pp. 366-367, 376). The authorities establish that a profit or gain so made will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.

And further:

The important proposition to be derived from [Californian Copper Syndicate] and [Ducker v. Rees Roturbo Development Syndicate Ltd (1928) A.C. 132] is that a receipt may constitute income, if it arises from an isolated business operation or commercial transaction entered into otherwise than in the ordinary course of the carrying on of the taxpayer's business, so long as the taxpayer entered into the transaction with the intention or purpose of making a relevant profit or gain from the transaction.

And further:

The proposition that a mere realization or change of investment is not income requires some elaboration. First, the emphasis is on the adjective "mere" (Whitfords Beach, at ATC pp. 4046-4047; C.L.R. p. 383). Secondly, profits made on a realization or change of investments may constitute income if the investments were initially acquired as part of a business with the intention or purpose that they be realized subsequently in order to capture the profit arising from their expected increase in value - see the discussion by Gibbs J. in London Australia, at ATC pp. 4403-4404; C.L.R. pp. 116-118. It is one thing if the decision to sell an asset is taken after its acquisition, there having been no intention or purpose at the time of acquisition of acquiring for the purpose of profit-making by sale. Then, if the asset be not a revenue asset on other grounds, the profit made is capital because it proceeds from a mere realization. But it is quite another thing if the decision to sell is taken by way of implementation of an intention or purpose, existing at the time of acquisition, of profit-making by sale, at least in the context of carrying on a business or carrying out a business operation or commercial transaction.

TR 92/3 also provides that profits from an isolated transaction will be income when:

•         the intention or purpose in entering into the transaction was to make a profit or gain, and

•         the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

Even where the requisite intention may not exist on entering into the transaction, the High Court held in Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 (Whitfords) there can be a change of intention.

In Whitfords there was a change of intention at the time a company holding a large parcel of land originally acquired for long-term investment, adopted a new set of articles that changed the intended usage of the land.

In Rosgoe Pty Ltd v Commissioner of Taxation (2015) FCA 1231, Logan J reinforced that the intent at acquisition and later, on sale of the property should be considered separately and the transactions as distinct activities:

When, later, the property was sold, the profit here arose not from the purchase but from the sale and because the sale was not part of the profit-making scheme the profit did not arise 'from the carrying on or carrying out' of that scheme.

The intention and purpose needs to be carefully considered in each and every case. In Westfield v Commissioner of Taxation [1991] FCA 86 ('Westfield'), Hill J said:

What was said in Myer has been applied in a number of cases in this court since. Among them are Moana Sand Pty Limited v Federal Commissioner of Taxation (1988) 88 ATC 4897, and Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42. It does not, however, follow from the judgment in Myer, or for that matter, from the judgments in any later cases, that every profit made by a Taxpayer in the course of his business activity will be of an income nature. To so express the proposition is to express it too widely, and to eliminate the distinction between an income and a capital profit.

The relevant intention or purpose of the taxpayer (of making a profit or gain) is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. Generally, in cases where a person's subjective purpose or intention is a relevant issue, the person's evidence as to their subjective purpose or intention can be considered but it must be tested closely, and received with the greatest caution.

Capital gain from mere realisation

For CGT to apply there needs to be a CGT event that happens to a CGT asset.

A CGT asset is defined in section 108-5, with note 1 indicating land is a CGT asset.

Division 104 sets out the CGT events that can happen to a CGT asset and section 104-10 provides that CGT event A1 occurs on the disposal of an asset.

As a consequence of CGT event A1, subsection 104-10(4) provides that you make a capital gain if the capital proceeds from the disposal are more than the assets cost base or conversely you make a capital loss if the capital proceeds are less than the assets reduced cost base.

The mere realisation of a capital asset will be subject to the CGT provisions.

Where the sale is a 'mere realisation' the sale is on capital account to which the CGT rules will generally apply. These proceeds are not ordinary income.

The expression 'mere realisation' is used to distinguish a mere realisation from a business operation or a commercial transaction carrying out a profit making scheme.

In Westfield, the company was in the business of designing, constructing, letting and managing shopping centres. The company acquired land in the early 1970s and further land via an option which it subsequently sold and realised at a substantial gain. The Full Federal Court held that the disposal of land was on capital account as the necessary intention or purpose of making a profit on the sale of the land was absent. This was because the main aim of the company was to secure contracts to design, develop and operate/manage a shopping centre on the land. The disposal of the land was incidental to these purposes. The fact that the transaction was commercial or a business transaction was, of itself, insufficient.

The Full Federal Court in reaching its decision considered the judgement in Myer and stated at 4241 that Myer 'emphasises that where a transaction occurs outside the scope of ordinary business activities, it will be necessary to find, not merely that the transaction is "commercial" but also that there was, at the time it was entered into, the intention or purposes of making a relevant profit'.

Other aspects of the judgement in Westfield discussed when profits from transactions outside the ordinary course of business of an entity constituted ordinary income at 4243:

Once it is clear that the activity of buying and selling, which generated the profit, was not an activity in the ordinary course of business, or, for that matter, an ordinary incident of some other business activity, the profit in question will only form part of the assessable income of the appellant, by virtue of its being income in accordance with the ordinary concepts of mankind, if the appellant had a purpose of profit-making at the time of acquisition.

And further at 4243...

While a profit-making scheme may lack specificity of detail, the mode of achieving that profit must be one contemplated by the taxpayer as at least one of the alternatives by which the profit could be realised. Such was the case in [Steinberg v Federal Commissioner of Taxation (1972-5) 134 CLR 640]. But, even if that goes too far, it is difficult to conceive of a case where a taxpayer would be said to have made a profit from the carrying on, or carrying out, of a profit-making scheme, where, in the case of a scheme involving the acquisition and resale of land, there was, at the time of acquisition, no purpose of resale of land, but only the possibility (present, one may observe, in the case of every acquisition of land) that the land may be resold. The same may be said to be the case where s. 25(1) of the Act is involved. As the court observed in Myer, in the passage already set out, the property, which generates the gain, must be acquired in an operation of business or commercial transaction:

"... for the purpose of profit-making by the means giving rise to the profit."

In determining whether a receipt is on revenue or capital account, the authorities establish that it is necessary to conduct "a wide survey and an exact scrutiny of the taxpayer's activities": Commissioner of Taxation v Stone (2005) 222 CLR 289 at [19]; Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 663 [69]; both citing Western Gold Mines NL v Commissioner of Taxation (WA) (1938) 59 CLR 729 at 740 per Dixon and Evatt JJ.

This 'wide survey' is particularly important where the sale of the asset is by a taxpayer conducting a business. Jacobs J noted in London Australia at 127:

The identification and characterization of the business carried on by the taxpayer is the essential task.

Under the principle in Grollo Nominees Pty Ltd v Commissioner of Taxation (1997) 73 FCR 452 at 514-515 there will be occasions when it is appropriate to take into account the activities of the broader group of which the taxpayer is a part.

Application to your circumstances

Profits or gains made in the ordinary course of business

The taxpayer has never undertaken any business involving property development.

Therefore, it is accepted that the proposed sale of the Property is outside the ordinary course of the taxpayer's business.

Profit making intention

The relevant intention or purpose of the taxpayer (of making a profit or gain) is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

In these circumstances there are a number of factors that indicate the property has been acquired and held as a capital asset for the purpose of generating long term rental income rather than acquired for the purpose of profiting from the sale of the property.

Conclusion

This leads to the conclusion that the Property was not acquired with the intention of profit making by sale, but rather to hold as a long-term investment.

The proposed sale of the Property is a mere realisation of a capital asset.

Question 2

Summary

The proposed sale of Property will not be treated as statutory income under section 15-15 of the ITAA 1997.

Detailed reasoning

Section 15-15 of the ITAA 1997 includes in assessable income any profit from the carrying on or carrying out of a profit-making undertaking or plan and is applicable when an asset was acquired before 20 September 1985 and the profit arises after 1997-98 year.

The TR 92/3 states at paragraph 35 that when a taxpayer makes a profit from an isolated transaction other than in the course of carrying on a business, the amount will be income where:

(a)    The intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain.

(b)    The transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

For a transaction to be characterised as a business operation or commercial transaction, it is sufficient if the transaction is business or commercial in character.

The mere realisation of a capital asset which was not acquired for the purpose of profit making by sale does not constitute a profit-making undertaking or scheme within meaning of section 15-15 of the ITAA 1997.

As discussed in question 1, the proposed sale of the Property is mere a realisation of a capital asset.

Question 3

Summary

The proposed sale of Property will be treated as statutory income under the capital gains tax provision in Part 3-1 of the ITAA 1997.

Detailed reasoning

As discussed in question 1, as a consequence of CGT event A1, subsection 104-10(4) provides that you make a capital gain if the capital proceeds from the disposal are more than the assets cost base or conversely you make a capital loss if the capital proceeds are less than the assets reduced cost base.

Subsection 104-10(5) of the ITAA 1997 states that a capital gain or gain loss you make from CGT event A1 is disregarded if you acquired the asset before 20 September 1985.

Further, building and structures constructed on land may be considered as separate CGT asset, subsection 108-55(2) says a building or structure that is constructed on land that you acquired before 20 September 1985 is taken to be a separate CGT asset from the land if:

a)    you entered into a contract for the construction on or after that day; or

b)    if there is no contract - the construction started on or after that day.

The building on the Property have been on the property since 19XX and further, you stated that there have not been any improvements to the Property or additional buildings constructed on the Property since 19XX.

Therefore, it is accepted that the Property (land and building) is considered to be a single CGT asset.

You acquired the Property before 19 September 1985, therefore the capital gain from the proposed sale of the property is disregarded as per subsection 104-10(5) if the majority underlying interests in the pre-CGT assets of the company have been maintained at the date of the disposal.

Question 4

Summary

For the purpose of Division 149 of the ITAA 1997, the majority underlying interests in the pre-CGT assets of the company have been maintained at the date of this ruling.

Detailed reasoning

Section 149-10 of the ITAA 1997 states;

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

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

Essentially, a CGT asset acquired before 20 September 1985 remains a pre-CGT asset if the majority underlying interests in the asset have not changed since 20 September 1985. Where a change in the majority underlying interests occurs the CGT asset is deemed to be acquired after 19 September 1985, under either Division 20 of the Income Tax Assessment Act 1936 (ITAA 1936) (income years prior to the 1999 income year) or Division 149 of the ITAA 1997 (1999 income year and succeeding income years).

The rulee is not a public company. Therefore, former subsection 160ZZS(1) of the ITAA 1936 will apply for income years up to and including the 1998 income year and Subdivision 149-B will apply for income years after the 1998 income year.

Under the factual test in subsection 149-30(1) of the ITAA 1997 an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985.

The meaning of 'majority underlying interests' in a CGT asset is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of:

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

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

Subsection 149-15(2) defines an underlying interest in a CGT asset as:

"...a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset."

An ultimate owner is defined in subsection 149-15(3) to include an individual or a company whose constitution prevents it from making any distribution, whether in money, property or otherwise to its members.

Subsections 149-15(4) and (5) provide that an ultimate owner has an indirect beneficial interest in a CGT asset of another entity if he/she/it would receive for his/her/its own benefit any capital or ordinary income distributed by the entity through interposed entities (e.g. companies, partnerships or trusts).

The expression 'beneficial interests' as used in the definition of majority underlying interests is not itself defined. In general law, a shareholder does not have any legal or equitable interest in the assets of a company. Thus, it would be difficult to see how an asset of a company can satisfy the majority underlying interests test and remain a pre-CGT asset

Under subsection 149-30(2), if the Commissioner is satisfied, or thinks it reasonable to assume, that the majority underlying interests in the asset have not changed up to a particular time, then subsections 149-30(1) and (1A) apply and the asset continues to be a Pre-CGT Asset

Subsection 149-30(4) provides that if an ultimate owner (new Owner) has acquired an interest in an asset which is transferred to them as a result of the death of a person (former owner), the new owner is treated as having held the underlying interest of the former owner over the years.

Assistance is provided in Income Tax Ruling IT 2340 Income Tax: capital gains: deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date (IT 2340)where the terms 'underlying interest' and 'majority underlying interest' as used in section 160ZZS of theITAA 1936 are discussed

IT 2340 states:

2. The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets [emphasis added].

Section 357-85 of Schedule 1 of the Taxation Administration Act 1953 provides that if the Commissioner has made a ruling about a relevant provision and that provision is re-enacted or remade, the ruling is taken to be about the re-enacted or remade provision, insofar as the new law expresses the same ideas as the old law. Section 357-85 applies to all rulings, including public rulings (paragraphs 49 to 50 of Taxation Ruling TR 2006/10 Public Rulings). As former section 160ZZS expresses the same ideas as Division 149, IT 2340 equally applies to Division 149.

Applying the 'look through' approach for the purposes of Division 149, a shareholder may be treated as having a beneficial interest in the company's assets. This approach has been supported by the Administrative Appeals Tribunal in AAT case 7529 (1991) 22 ATR 3532, Case Y59 91 ATC 502.

Events that resulted in changes of shareholding prior to the start of 1998-1999 income year

For events that occurred prior to the start of 1998-1999 income year, in order to address subsection 149-10(b) we need to consider former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA1936). It stated:

For the purposes of the application of this Part in relation to a taxpayer, an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset

Former subsection 160ZZS(3) of the ITAA 1936 defined majority underlying interests when applying 160ZZS(1) as having the same meaning as in Subdivision 3G of Part III.

Majority underlying interests was defined in former subsection 82KZC(1) of the ITAA 1936 to mean more than one-half of:

(a)    The beneficial interests that natural persons hold (whether directly or through one or more interposed companies, partnerships or trusts) in the property, and

(b)    The beneficial interests held by natural persons (whether directly or through one or more interposed companies, partnerships or trusts) in any income that may be derived from the property.

Former subsection 160ZZS(2) of the ITAA 1936 (the transitional provision applicable in 1994 and the equivalent provision to subsections 149-30(3) and 149-30(4) of the ITAA 1997) provides:

For the purposes of this section, where, by reason of the death of a person, a natural person acquires a percentage (in this subsection referred to as the "acquired percentage") of the underlying interests in an asset, the natural person shall be deemed to have held (in addition to any other part of the total underlying interest that the person held or is deemed to have held), at any time when the deceased person held a percentage (in this subsection referred to as the "deceased person's percentage") of the total underlying interests in the property, a percentage of the total underlying interests in the property equal to the acquired percentage, or the deceased person's percentage at that time, whichever is the less."

Former subsection 160ZZRU of the ITAA 1936 which replaced subsection 160ZZS(2) with effect from 20 January 1997, and the equivalent provision to subsections 149-30(3) and 149-30(4) of the ITAA 1997), provides:

For the purposes of this Division, if, because of a person's death, a natural person acquires a percentage (the acquired percentage) of the underlying interests in an asset, the natural person is taken to have held (in addition to any other part of the total underlying interests that the person held or is taken to have held), at any time when the dead person held a percentage (the dead person's percentage) of the total underlying interests in the asset, a percentage of the total underlying interests in the asset equal to the acquired percentage, or the dead person's percentage at that time, whichever is the less.

Application to your circumstances

There have been a number of changes to the shareholders in the taxpayer since 19 September 19XX.

None of those changes result in a change of majority shareholdings in the taxpayer since 19 September 19XX.

Conclusion

At all times on and after 20 September 1985 until the time of this ruling application, the majority underlying ownership interest in the Property held by the taxpayer have been held by persons who, immediately prior to 20 September, held majority underlying interest in those assets. The Property has not stopped being a pre-CGT asset of the taxpayer at the date of this ruling.