Edited version of private advice

Authorisation Number: 1052015686029

Date of advice: 15 August 2022

Ruling

Subject: Pre-CGT asset

Question

Was the property located at X (the Property) a pre-CGT asset within the meaning given by section 149-10 of the Income Tax Assessment Act 1997 (ITAA 1997) when it was sold by Company B during the year ended XXXX?

Answer

No.

This ruling applies for the following:

Year ended XXXX

The scheme commences on:

During the year ended XXXX

Relevant facts and circumstances

Company A is a foreign resident company that was incorporated before 20 September 1985 and is a publicly listed company on a foreign stock exchange since that time.

Before 20 September 1985 Company B, an Australian resident company, was incorporated.

Since incorporation Company B's total shares on issue are beneficially held by Company A.

Based on the available shareholder information Company B is unable to trace through to the ultimate owners, as defined in subsection 149-15(3) of the ITAA 1997, of Company A and therefore cannot demonstrate that majority underlying interests in the assets of the company, for the purposes of Division 149 of the ITAA 1997, had been maintained since 19 September 1985.

Company B purchased the Property before 20 September 1985 for $X.

Company B sold the Property during the year ended XXXX for $X.

Relevant legislative provision

Income Tax Assessment Act 1997 section 149-10

Reasons for decision

All legislative references in this Reasons for decision are to the ITAA 1997 unless otherwise indicated.

Detailed reasoning

Section 149-10 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

(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; 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.

* Denotes a term defined in subsection 995-1(1).

Paragraph 149-10(a) is satisfied as the Property is a CGT asset that was acquired by Company B before 20 September 1985.

Paragraph 149-10(b) requires that immediately before the start of the 1998-99 income year, Company B was not taken under former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA 1936) (Subdivision 149-B) or Subdivision C of Division 20 of former Part IIIA of the ITAA 1936 (Subdivision 149-C) to have acquired the asset on or after 20 September 1985.

Taxation Ruling TR 1999/4 Income tax: capital gains: changes in majority underlying interests in assets of public entities for Division 20 of Part IIIA of the Income Tax Assessment Act 1936 provides at paragraph 8 and 9 the background to former section 160ZZS of the ITAA 1936 and Division 20 of former Part IIIA of the ITAA 1936:

8. Section 160ZZS determines when assets acquired by taxpayers (including public entities) before 20 September 1985 ('pre-CGT assets') lose their pre-CGT status as a result of a change in majority underlying interests held by natural persons. Schedule 4 of the Taxation Laws Amendment Act (No 1) 1997 inserted a new Division 20 into Part IIIA of the 1936 Act, which removed public entities (public companies, publicly traded unit trusts and mutual insurance organisations) from the application of section 160ZZS from 20 January 1997. It also amended the way certain public entities determine whether pre-CGT assets become subject to the capital gains tax provisions because of a change in the majority underlying interests in those assets.

9. Division 20 requires public entities to determine, at certain prescribed times, whether the majority underlying interests in their pre-CGT assets are held by the same natural persons who held those interests at the base time (the last moment of 19 September 1985 or an alternative time within the period 1 July 1985 to 30 June 1986 that gives a reasonable approximation of underlying interests as at 19 September 1985). If the same natural persons did not hold the majority underlying interests in the assets at the base time and at the test time, the pre-CGT assets are taken to have been acquired at the test time or at an earlier time at which the public entity should have examined the underlying interests under section 160ZZS. The public entity is required to determine the cost base of the assets for capital gains tax purposes on the basis of their market value at the relevant time.

The terms referred to in the former provisions of the ITAA 1936 and their ITAA 1997 equivalent, if any, are set out in the table below.

In view of the above the terms used in the ITAA 1997 are referred to below.

The terms MUI, underlying interest and ultimate owner are defined in section 149-15 as follows:

(1) Majority underlying interests in a * CGT asset 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.

(2) An underlying interest in a * CGT asset is 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.

(3) An ultimate owner is:

(a)  an individual; or

(b)  a company whose * constitution prevents it from making any distribution, whether in money, property or otherwise, to its members; or

(c)   the Commonwealth, a State or a Territory; or

(d)  a municipal corporation; or

(e)  a * local governing body; or

(f)    the government of a foreign country, or of part of a foreign country.

* Denotes a term defined in subsection 995-1(1).

Company B was required to test for a change in MUI in its assets under former section 160ZZS of the ITAA 1936.

Company B is required to trace through to the ultimate owners of Company A to determine whether there has been a change in MUI in its assets since the starting day (19 September 1985).

Further, Company A, being a company listed on a foreign stock exchange that beneficially owns all of the issued shares in Company B, and Company B are public entities for the purposes of former section 160ZZS of the ITAA1936 and Division 20 of former Part IIIA of the ITAA 1936.

However, Company B is unable to trace through to the ultimate owners of Company A based on the shareholder information available to the company and therefore cannot demonstrate that MUI in the assets of the company has been maintained since 19 September 1985.

As a result, the assets of Company B including the Property are taken to have been acquired on 20 September 1985 under former section 160ZZS of the ITAA 1936 for their market value at that time.

Therefore, paragraph 149-10(b) is not satisfied and the Property is not a pre-CGT asset within the meaning of section 149-10 at the time of its disposal by Company B.