Edited version of private advice

Authorisation Number: 1051932553760

Date of advice: 13 December 2021

Ruling

Subject: Capital gains tax

Question 1

Where the Ordinary Shares in entity A (the Company) are disposed of by entity B (the Trust) to entity C only, with entity D retaining an interest in the Relevant Company Assets by way of the redeemable preference shares (RPS), will the requisite majority underlying interests in the relevant assets of the Company be maintained, such that the Relevant Company Assets retain their pre-CGT status under Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Where the Company's Ordinary Shares are disposed of by the Trust to entity C and D such that entity C obtains a majority ordinary shareholding in the Company by acquiring xx% of the Ordinary Shares and entity D obtains a minority ordinary shareholding in the Company by acquiring xx% of the Ordinary Shares, will the requisite majority underlying interests in the relevant assets of the Company be maintained, such that the Relevant Company Assets retain their pre-CGT status under Division 149 of the ITAA 1997?

Answer

Yes.

Question 3

Where either entity C or D or both pass away before the Transaction is carried out, while the Company's Ordinary Shares are still owned by the Trust and before the ending date of the Trust, would section 149-30 of the ITAA 1997 apply such that the Relevant Company Assets retain their pre-CGT status under Division 149 of the ITAA 1997?

Answer

Yes.

Question 4

Where entity C acquires the majority interest in the Company's Ordinary Shares via one or more intermediary companies which are wholly owned by entity C, will the pre-CGT status of the Relevant Company Assets be preserved under Division 149 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts

Entity A (the Company) was incorporated on xxxx.

Entity B (the Trust) was established on xxxx, when entity Entity E settled the sum of $xxxx.00 on entity F as trustee.

The Trust was created for the benefit of the x children of entity G, entity D and entity C, who were then aged xx and xx, respectively. Entity D and C have at all times been the beneficiaries of the Trust.

The settlement moneys of the Trust were used by the Trustee to acquire xx x $xxxx Ordinary Shares in the Company before 1985. A premium of $xx per share was paid.

The Ordinary Shares in the Company have been wholly owned by the Trust since the formation of the Trust.

There are also xx x $xx redeemable preference shares (RPS) in the Company on issue. Underlying interests in these shares are ultimately also equally held by entity C and D through investment companies which are each wholly owned by them personally.

These RPS were issued on xxxx, after 1985. The RPS provide holders with both income rights by way of potential dividend participation, and capital rights by way of the right to a return of capital on cancellation or redemption. The rights of the RPS are set out as follows in the Company's constitution.

As at 19 September 1985, there were also xxxx cumulative preference shares (CPS) in the Company on issue. Those shares were held equally (both legally and beneficially) by entity C and D in their personal names, that is, xxxx shares were held each. These CPS were bought back on xxxx.

The Company owns the listed assets which were acquired before 20 September 1985. These assets are collectively referred to as the Relevant Company Assets.

By the Deed of Appointment dated xxxx, entity C and D were appointed as trustees of the Trust by the Deed of Appointment to replace entity F.

In or around xxxx, the xxx $xxxx ordinary shares in the Company were split into xxxx x $xxxx shares.

The Trustees have always administered the Trust for the benefit of entity C and D in accordance with the terms of the Deed.

The Trust Deed has been provided which provide the key elements of the Trust.

The beneficial interests in the Trust are held equally by each of entity C and D, and in the event of either of their deaths, by their respective lineal descendants, subject to the occurrence of any events which may require resort to the terms of the Deed which apply in the event of no person attaining a vested interest in part of the Trust.

The only amendment that has been made to the terms of the Trust as reflected in the Deed, is the change of trustee and the Deed of Amendment, which extended the ending date. Otherwise, the terms of the Trust remain as per the (original) Deed.

The Trustees intend to vest the Trust in xxxx and distribute the capital of the Trust in accordance with the terms of the Deed.

Since it was settled, all distributions from the Trust have been made 50% to each of entity C and D. No beneficiaries have been added to the Trust.

For the purposes of succession planning, it is proposed that the pre-CGT Ordinary Shares in the Company held by the Trust will be disposed of for market value consideration to the Beneficiaries (the Transaction).

The Ordinary Shares held by the Trust constitute 100% of the ordinary shares on issue in the Company.

Entity C intends to acquire either xx% or xx% of the Ordinary Shares (the majority interest), and entity D intends to acquire either xx or xx of the Ordinary Shares (the minority interest).

After the disposal of the Ordinary Shares, the Trust is to be vested in accordance with its terms. It is therefore expected that the assets of the Trust will be distributed equally to entity C and D, or in the event of their passing, to their children, in accordance with the terms of the Deed. The assets of the Trust will largely consist of the consideration received on disposal of the Ordinary Shares.

Consideration is also being given to the majority interest being acquired by one or more investment companies, which themselves would be wholly owned by entity C personally.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 section 149-15

Income Tax Assessment Act 1997 section 149-30

Reasons for decision

Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the circumstances when an asset acquired before 20 September 1985 stops being a pre-CGT asset. Under subsection 149-30(1) of the ITAA 1997, an asset 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.

Majority underlying interests in a CGT asset is defined in subsection 149-15(1) of the ITAA 1997 to consist of:

(a) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

(b) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in any ordinary income that may be derived from the asset.

An ultimate owner is defined in subsection 149-15(3) of the ITAA 1997 and includes an individual.

Subsections 149-15(4) and 149-15(5) of the ITAA 1997 establish when an ultimate owner indirectly has a beneficial interest in the pre-CGT asset through other entities.

As stated in subsection 149-15(4) of the ITAA 1997, an ultimate owner indirectly has a beneficial interest in a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if:

(a) the other entity were to distribute any of its capital; and

(b) the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner.

Subsection 149-15(5) of the ITAA 1997 states that an ultimate owner indirectly has a beneficial interest in ordinary income that may be derived from a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of a dividend or income if:

(a) the other entity were to pay that dividend, or otherwise distribute that income; and

(b) the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner.

Subsection 149-30(2) of the ITAA 1997 provides that 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 time majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day, subsections 149-30(1) and 149-30(1A) apply as if that were in fact the case.

Under subsection 149-30(3) of the ITAA 1997, where there is a death of an original owner, the new owner stands in the shoes of the former owner. That is, for Division 149 of the ITAA 1997 purposes, there has been no change in the majority underlying interest upon the death of an original ultimate owner.

Question 1

The Ordinary Shares in the Company have been held since prior to 20 September 1985 by the Trust.

At all times since its establishment, the Trust has been administered by both the current and former Trustees of the Trust pursuant to the terms of the Deed for the benefit of entity C and D.

Since it was settled, all distributions from the Trust have been made xx% to each of entity C and D. No beneficiaries have been added to the Trust, and the only amendments to the terms of the Trust are the change of Trustee and the extension of the term of the Trust, as per the Deed of Amendment.

Under the terms of the Trust Deed, it is considered that entity C and D have a xx% interest of the income derived by the Trust from time to time; and upon termination of the Trust (the 'ending date') a xx% interest of the capital of the Trust.

It is acknowledged that under the Deed, the Trustee is empowered to amend the terms of the Deed. However, this power can only be exercised those outlined and the prospect of a change that would impact on the beneficial entitlements of entity C and D is extremely remote.

It is considered that the underlying ownership of the Ordinary Shares in the Company has remained constant at all times since 19 September 1985 and the underlying ownership of these shares has at all relevant times rested with the underlying beneficiaries of the Trust, with entity C and D each holding a xx% beneficial interest in the capital and income of the assets of the Trust since before 20 September 1985.

The only other shares in the Company which have been on issue during the period since 19 September 1985 are the RPS and the CPS and the underlying ownership of both classes of shares was at all times, either directly or indirectly, entity C as to xx% and entity D as to xx%.

Entity C and D, as the beneficiaries of the Trust and underlying owners of all shares in the Company have at all times since 19 September 1985 held all underlying interests in the Company. Accordingly, entity C and D have maintained majority underlying ownership in the Relevant Company Assets since 19 September 1985 and the Relevant Company Assets have maintained their pre-CGT status to the present date.

Following the transfer of the Ordinary Shares to entity C, entity C and D will together hold 100% of the interests in the Company.

The Transaction results in changes in the relative proportions in which the ultimate owners hold the income and capital rights in relation to the Relevant Company Assets, but does not change the members of the group who make up the ultimate owners before and after the Transaction.

That is, there would be no change in the majority underlying interests if all the Ordinary Shares are disposed of by the Trust to entity C, as both entity C and D would between them continue to hold all the underlying interests in Relevant Company Assets. Therefore, the pre-CGT status of the Relevant Company Assets will be preserved.

Question 2

Where the Ordinary Shares of the Company held by the Trust will be disposed of for market value consideration to the beneficiaries, with entity C acquiring xx% of the Ordinary Shares and entity D acquiring xx% of the Ordinary Shares, entity C will obtain a majority shareholding in the Company, and entity D will obtain a minority shareholding in the Company.

Entity C and D will continue to hold interests in xx% of the RPS, which provide both income rights by way of potential dividend participation, and capital rights by way of the right to a return of capital.

Entity C and D will continue to hold between them 100% of the underlying interests in the shares of the Company and therefore both income rights and capital rights in relation to the Relevant Company Assets. There would be no change in the membership of the group of ultimate owners who had majority underlying interests in the Relevant Company Assets since 19 September 1985. The change in the proportions in which entity C and D, as natural persons, hold interests in the Relevant Company Assets would not change the majority underlying interest in the CGT assets.

That is there would be no change in the majority underlying interests for the purposes of Division 149 of the ITAA 1997 if all the Ordinary Shares in the Company are disposed of by the Trust with entity C acquiring xx% of the Ordinary Shares and Sandra acquiring xx% of the Ordinary Shares, as both entity C and D would between them continue to hold all the underlying interests in Relevant Company Assets. Therefore, the pre-CGT status of the Relevant Company Assets will be preserved following the Transaction as considered in Question 2.

Question 3

If either entity C or D or both were to pass away before the Transaction is carried out, under subsections 149-30(3) and 149-30(4) of the ITAA 1997 the new owner is taken to have owned those interests for the time in which the former owner owned those interests.

Therefore, if either entity C or D or both were to pass away before the relevant Transaction is carried out, while the Ordinary Shares are still owned by the Trust and before the ending date of the Trust, their children would obtain an acquired percentage of the underlying interests in the Relevant Company Assets because of the relevant death. Therefore, the Relevant Company Assets would continue to maintain their pre-CGT status, as all underlying interests in those assets would be held by the survivor of entity C or D, and/or their respective children, who would be treated as 'standing in the shoes of the former owner'.

Question 4

Where entity C acquires the majority interest in the Ordinary Shares of the Company via one or more intermediary companies which are wholly owned by entity C, entity C will still hold legal and beneficial interests in the shares of the Company (either directly or indirectly).

In this case, the requirements of sections 149-15(4) and 149-15(5) of the ITAA 1997 will be satisfied and entity C will have an indirect beneficial interest in the capital and ordinary income. Therefore, the pre-CGT status of the Relevant Company Assets would be preserved following the Transaction as considered in Question 4.

That is, the insertion of an intermediary company between the Company and entity C will not change the majority underlying interests in the Relevant Company Assets for the purposes of Division 149 of the ITAA 1997.