Edited version of private advice

Authorisation Number: 1052059120548

Date of advice: 17 November 2022

Ruling

Subject: Majority underlying ownership

Question 1

Did the property cease being a pre-capital gains tax (CGT) asset in accordance with section 149-30 of the Income Tax Assessment Act 1997 (ITAA 1997) because of the death of Individual A?

Answer

No.

Question 2

Did the property cease being a pre-CGT asset in accordance with section 149-30 of the ITAA 1997 when the shares transferred to Individual B as a beneficiary of the Estate of Individual A?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The shares in the company were, at all time from before 20 September 1985 until the death of individual A, held by the following parties:

A class shares (right to receive dividends, right to capital on windup and voting rights)

•         Individual A - 1 share

•         Individual B - 1 share

B class shares (right to receive dividends, right to capital on windup and no voting rights)

•         Individual A - 1 share

•         Individual C - 1 share

•         Individual D - 1 share

•         Individual E - 1 share

Prior to 20 September 1985, the company acquired a property.

In 20XX, individual A passed away.

At that time, their A class share passed to individual B as executor for the Estate.

In 20XX, individual B ceased holding the shares as an executor of the Estate. At this time individual B acquired the shares as a beneficiary of the Estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 Section 149-30

Reasons for decision

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 being acquired after that date for CGT purposes.

Under subsection 149-30(1) of the ITAA 1997, a pre-CGT asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interest in the asset were not had by the ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985.

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.

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. Essentially the new owner will stand in the shoes of the former owners.

ATO Interpretative Decision 2003/779 (ATO ID 2003/779) provides guidance on majority underlying ownership and continuity of interest during the period of administration of a deceased estate. ATO ID 2003/779 provides that:

To give subsections 149-30(3) and 149-30(4) of the ITAA 1997 their intended effect, it is necessary to apply subsection 149-30(1) of the ITAA 1997 as if the beneficiary had beneficial interests in the assets of the estate from the date of the deceased person's death until the time the estate has been fully administered. Subsections 149-30(3) and 149-30(4) could never achieve their purpose if the period of administration were treated as a period when no one had any beneficial interests.

In 20XX, individual B acquired individual A's shares in the company as a result of their death. In accordance with section 149-30 of the ITAA 1997, this transfer will not change the majority underlying interest in the company's assets.

Accordingly, the pre-CGT status of the company's ownership of the property will remain as the majority underlying interest has not changed since 19 September 1985.