Edited version of private advice

Authorisation Number: 1051932869636

Date of advice: 16 December 2021

Ruling

Subject: Sale of pre-CGT assets and majority underlying interests

Question 1

For the purposes of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) is the Commissioner satisfied, or does the Commissioner think it is reasonable to assume that majority underlying interests in the assets have been held by the same ultimate owners, at all times from immediately before 20 September 1985 to the disposal of the assets?

Answer

Yes.

Question 2

Will the disposal of the properties in the 20XX financial year result in an amount being assessable as either income or capital gain?

Answer

No.

Question 3

Will the distribution of funds from the sale of preference shares be treated as assessable income in the hands of the shareholders?

Answer

No.

ruling applies for the following period:

Year ended 30 June XXXX

The scheme commences on:

X XX XXX

Relevant facts and circumstances

The company was registered XX XX XXXX.

The company started trading in XXXX.

The company ceased trading XXXX.

The company operated a XXXX business.

The company owned a number of residential properties.

These rental properties were built before 20 September 1985 (no major improvements were made to the properties) and were used by the company employees as an accommodation facility. The company did not charge rental fees to employees.

The company started renting the properties to the general public in xxxx after the business ceased.

The residential properties were all sold in the XXXX tax year.

The company also owned X blocks of land that were sold in the XXXX tax year (purchased prior to 20 September 1985.

The company did not keep a company register of shareholders as required by ASIC.

You have recreated the share register with assistance of the previous company tax agent and the current shareholders.

The current shareholders are all part of the same family group

The reconstructed share register shows that the majority underlying interests in the assets have been always held by the same ultimate owners from immediately before 20 September 1985 to the date of disposal of the properties.

The preference shares purchased from XXXX Pty Ltd were bought back by XXXX Pty Ltd for the same amount as they were purchased.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 section 104-10(5)

Income Tax Assessment Act 1997 section 6-5

Reasons for decision

Question 1

For the purposes of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) is the Commissioner satisfied, or does the Commissioner think it is reasonable to assume that majority underlying interests in the assets have been held by the same ultimate owners, at all times from immediately before 20 September 1985 to the disposal of the assets?

Summary

Based on the reconstructed share register you provided it appears the majority underlying interests in the assets have been held by the same ultimate owners at all times from immediately before 20 September 1985 till the disposal of the assets (properties).

Detailed reasoning

Capital Gains

Broadly, Division 149 of the ITAA 1997 prevents assets being treated as pre-CGT assets if there is a change in their majority underlying ownership.

Division 149 of the ITAA 1997 discusses when an asset stops being a pre-CGT asset. Subdivision 149-B of the ITAA 1997 relevantly discusses when an asset of a non-public entity, such as a private company, stops being a pre-CGT asset.

Subsection 149-30(1) of the ITAA 1997 states that the asset stops being a pre-CGT asset at the earliest time when the 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 (MUIs) are defined at section 149-15 of the ITAA 1997. MUIs consist of more than 50% of the beneficial interests that ultimate owners (in this case individuals in accordance with subsection 149-15(3) of the ITAA 1997) have, whether directly or indirectly, in:

a) the asset; and

b) in any ordinary income that may be derived from the asset.

Subsection 149-30(1) of the ITAA 1997 will also not apply, if the Commissioner is satisfied, or thinks it is reasonable to assume that the majority underlying interests have not changed (subsection 149-30(2) of the ITAA 1997).

The transfer of underlying ownership interest in a pre-CGT asset as a result of a former owner's death or marriage breakdown is ignored for the purposes of subdivision 149 - B (subdivision 149-30(3) and (4) of the ITAA 1997).

Analysis of the ownership changes outlined above using the assumption that discretionary dividends were distributed equally, provides that the majority proportion of the shares with rights to dividends from the taxpayer have remained with the same underlying individuals.

The Commissioner finds it reasonable to assume, that the majority underlying interests have been held at all times by the same ultimate owners who held the interests immediately before 20 September 1985. Consequently, the identified properties held by the company retain their pre-CGT status. Section 104-10(5) ITAA 1997 states that a capital gain is disregarded if you acquired the asset before 20 September 1985. As all the properties in question were acquired prior to 20 September 1985 and no major improvements have been made to the properties since that date any capital gain made on the sale of the properties may be disregarded.

Question 2

Will the disposal of the properties in the XXXX financial year result in an amount being assessable as either income or capital gain?

Summary

We have established above that the properties retain their pre-CGT status and consequently there is no capital gains tax payable. Further, as the properties were not held for a profit-making scheme or undertaking or part of trading stock the gains made on sale will not be assessable as ordinary income.

Detailed reasoning

Ordinary income

Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693(Myer Emporium)).

Taxation Ruling TR 92/3 Income Tax: whether profits on isolated transactions are income (TR 92/3), considers the principles outlined in Myer Emporium and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

Paragraph 1 of TR 92/3 outlines that isolated transactions are:

a) those transactions outside the ordinary course of business of a taxpayer carrying on a business; and

b) those transactions entered into by non-business taxpayers.

The ruling outlines at paragraph 6 that whether a profit from an isolated transaction will be ordinary income will depend on the circumstances of the case, however a profit from an isolated transaction will be ordinary income when:

a) the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain; and

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

TR 92/3 outlines that the relevant intention or purpose of the taxpayer, of making a profit or gain, is not the subjective intention or purpose of the taxpayer. Rather, it is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case.

If a transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question.

In your case the properties were built to house employees working for the business and the properties were disposed of after the business ceased. There was no profit-making intention.

Question 3

Will the distribution of funds from the sale of preference shares be treated as assessable income in the hands of the shareholders?

Summary

As the funds received from the sale of preference shares by the company equalled the amount paid for the shares there is no gain to assess.