| Disclaimer You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of private advice
Authorisation Number: 1051973758478
Date of advice: 13 May 2022
Ruling
Subject: CGT - majority underlying ownership
Question 1
Answer
Yes.
Question 2
Alternatively, will the Commissioner be satisfied or believe it is reasonable to assume under subsection 149-30(2) of the ITAA 1997 that for all practical purposes the majority underlying interests in the assets of the company will not change as a consequence of the vesting of the trust and the capital of the trust continuing to be held upon trust by the trustee for the sole benefit of the primary beneficiary as provided for in the relevant clause of the deed?
Answer
Yes.
Question 3
Will the assets owned by the company that were acquired prior to 20 September 1985 continue to be pre-capital gains tax (CGT) assets as a consequence of the vesting of the trust and the transfer of the shares in the company to the primary beneficiary of the trust?
Answer
Yes.
Question 4
Alternatively, will the assets owned by the company that were acquired prior to 20 September 1985 continue to be pre-CGT assets as a consequence of the vesting of the trust and the capital of the trust continuing to be held upon trust by the trustee for the sole benefit of the primary beneficiary as provided for in the relevant clause of the deed?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 20XX
Year ending 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The trust is a discretionary trust established pre-CGT. The trustee of the trust was incorporated pre-CGT. The trustee has discretionary power to, inter alia, apply income and capital of the trust to the primary beneficiaries.
The sole asset of the trust is 100% of the shares in the company which were acquired by the trust within days of incorporation of the company, pre-CGT.
The underlying assets of the company are:
• pre-CGT and post-CGT real property
• pre-CGT and post-CGT ASX-listed shares
• cash
The share structure of the company is comprised of ordinary shares and another class of shares. Descriptions of the rights of the shareholders have been provided.
The trustee has always held the ordinary shares in the company as trustee of the trust. There have been changes to shareholdings of the other class of shares due to deaths of shareholders and executions of wills that occurred pre-CGT and post-CGT.
The trust has made a family trust election with a relative of the taxpayer being the test individual.
The taxpayer has been a primary beneficiary of the trust since establishment of the trust. No new beneficiaries have been appointed since establishment of the trust. Trust distributions have been made solely to the relevant primary beneficiaries.
The trust deed has clauses which describe the beneficiary classes including primary beneficiaries. The trust deed also has clauses which allow for the changing of the trust's vesting date in certain situations.
The trustee is considering changing the vesting date and is considering applying the trust's capital to the taxpayer as the sole surviving primary beneficiary.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 104
Income Tax Assessment Act 1997 section 104-75
Income Tax Assessment Act 1997 subsection 104-75(3)
Income Tax Assessment Act 1997 subsection 104-75(4)
Income Tax Assessment Act 1997 subsection 104-75(5)
Income Tax Assessment Act 1997 paragraph 104-75(6)(b)
Income Tax Assessment Act 1997 Division 149
Income Tax Assessment Act 1997 section 149-15
Income Tax Assessment Act 1997 subsection 149-15(1)
Income Tax Assessment Act 1997 section 149-30
Income Tax Assessment Act 1997 subsection 149-30(1)
Income Tax Assessment Act 1997 subsection 149-30(1A)
Income Tax Assessment Act 1997 subsection 149-30(2)
Income Tax Assessment Act 1997 subsection 149-30(3)
Reasons for decision
Trust vesting
The Commissioner's views on the tax consequences of the vesting of a trust are found in Taxation Ruling TR 2018/6 Income tax: trust vesting - consequences of a trust vesting. Paragraph 3 of TR 2018/16 provides that the income tax consequences that arise on, and after, the vesting of a trust depend on the terms of the deed. Vesting of itself may, but need not, cause a capital gains tax (CGT) event to happen.
Paragraph 8 of TR 2018/6 provides that once the trust has vested, the interests in the trust property become fixed at law.
Paragraph 12 of TR 2018/6 provides that, in the case of a discretionary trust, from the time the trust vests the trustee no longer has any discretionary power to appoint the income or capital of the trust. Rather it holds the trust property for the absolute benefit of those beneficiaries specified as the takers on vesting. Paragraph 20 provides that the vesting of a trust may result in the takers on vesting becoming absolutely entitled as against the trustee to CGT assets of the trust, depending on the particular interests of the takers on vesting. This will trigger CGT event E5 to occur, per section 104-75 of the ITAA 1997.
CGT Event E5
Subsection 104-75(3) of the ITAA 1997 provides that the trustee makes a capital gain if the market value of the asset (at the time of the event) is more than its cost base. The trustee makes a capital loss if that market value is less than the asset's reduced cost base. Relevantly, subsection 104-75(4) of the ITAA 1997 provides that a capital gain or capital loss the trustee makes is disregarded if it acquired the asset before 20 September 1985.
Subsection 104-75(5) of the ITAA 1997 provides that the beneficiary makes a capital gain if the market value of the asset (at the time of the event) is more than the cost base of the beneficiary's interest in the trust capital to the extent it relates to the asset. The beneficiary makes a capital loss if that market value is less than the reduced cost base of that beneficiary's interest in the trust capital to the extent it relates to the asset. Relevantly, paragraph 104-75(6)(b) of the ITAA 1997 provides that a capital gain or capital loss the beneficiary makes is disregarded if the beneficiary acquired [the interest] before 20 September 1985.
Although any gain or loss is disregarded by both trustee and beneficiary due to the assets being pre-CGT, the transfer of these assets will deem them to become post-CGT assets.
Division 149 of the ITAA 1997
Division 149 of the ITAA 1997 outlines the rules which govern when an asset acquired by a taxpayer before 20 September 1985 is treated as having been acquired after that date for CGT purposes.
Subsection 149-15(1) of the ITAA 1997 provides that majority underlying interests in a CGT asset consists of:
• more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and
• 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.
Changes to shareholdings
Subsection 149-30(1) of the ITAA 1997 provides that 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.
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 (1) and (1A) apply as if that were in fact the case.
Changes to shareholdings following the death of a shareholder
Subsection 149-30(4) of the ITAA 1997 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 (the former owner), the new owner is treated as having held the underlying interest of the former owner over the years. Effectively it is deemed that there is no change from the former owner to the new owner, following the death of the former owner.
Beneficial interests; majority underlying interests held by discretionary trusts
Where shares in a company are held by a discretionary trust, a beneficiary to the trust could not be said to have a beneficial interest in the income or assets of the trust, including those shares.
However, paragraphs 5 to 7 of Taxation 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 discuss what happens in respect of non-fixed family trusts, and the application of the former section 160ZZS of the Income Tax Assessment Act 1936 (ITAA 1936) (now Division 149 of the ITAA 1997):
5. In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised.
6. Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS of the ITAA 1936 into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion.
7. In such a case the Commissioner would, in terms of sub-section 160ZZS(1) of the ITAA 1936, find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed. That is consistent with the role of the section to close potential avenues for avoidance of tax in cases where there is a substantial change in underlying ownership of assets and the legislative guidance contained in Subdivision G of Division 3 of Part III of the Act. On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provisions of the Act.
Application to your circumstances
The trustee acquired its shares in the company pre-CGT. Therefore the taxpayer, as a primary beneficiary of the trust, acquired their interest in the shares in the company pre-CGT. On vesting of the trust, CGT event E5 will occur but any capital gain or loss is disregarded by both trustee and beneficiary per section 104-75 of the ITAA 1997.
When the ordinary shares in the company are transferred to the taxpayer on vesting of the trust, or continue to be held by the trustee on trust for the taxpayer, the shares will become post-CGT assets and the taxpayer will be taken to have acquired the shares at that date with a deemed cost base equal to the market value of the underlying assets of the company.
The ordinary shares in the company have always been held by the trustee since the shares were issued after incorporation, pre-CGT. The other class of shares transferred across members of the family group pre-CGT and post-CGT due to executions of wills of the respective family members, therefore section 149-30(4) of the ITAA 1997 would apply such that the new owners are treated as having held the underlying interests of the former owners over the years, and accordingly it is taken that there has not been a change in majority underlying interests of the company.
It is therefore taken that the underlying pre-CGT assets of the company have retained their pre-CGT status.