Edited version of private advice

Authorisation Number: 1052063090126

Date of advice: 25 November 2022

Ruling

Subject: CGT - pre-CGT asset

Question 1

Is the Property a 'pre-CGT asset' of the Company as set out in section 149-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Is any capital gain or capital loss arising from CGT event A1 happening to the Property disregarded under section 104-10 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June XXXX

Relevant facts and circumstances

The Company (the Rulee) acquired a CGT asset (the Property) before 20 September 1985 (CGT Date).

The Rulee sold the Property (Sale Date).

The Rulee has a number of shareholders, including companies and trusts.

The Rulee has provided information that demonstrates that there are shareholders in the Rulee who constitute a group of ultimate owners who have maintained majority underlying interests in the Property (Majority Group) at all times from the date of acquisition to the date of disposal of the Property.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 160ZZS

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 Division 149

Reasons for decision

Question 1

Summary

The Property acquired before 20 September 1985 is pre-CGT asset of the Company pursuant to section 149-10 of the ITAA 1997.

Detailed reasoning

Division 149 of the ITAA 1997

Division 149 of the ITAA 1997 contains the provisions under which an asset acquired before 20 September 1985 is treated as having been acquired after that date, that is, the asset stops being a pre-CGT asset. Subdivision 149-B of the ITAA 1997 provides for when the asset of an entity stops being a pre-CGT asset for entities that are not covered by section 149-50 of the ITAA 1997. Effectively, Subdivision 149-B deals with non-public entities.

A CGT asset is defined in subsection 108-5(1) of the ITAA 1997 as any kind of property or a legal or equitable right that is not property. A CGT asset is a pre-CGT asset if it was last acquired before 20 September 1985 and no income tax provision has operated to treat it as having been acquired after that date.

Section 149-10 of the ITAA 1997 provides as follows:

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.

Section 149-30 of the ITAA 1997 provides that an asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985.

Relevantly, subsection 149-30(3) of the ITAA 1997 provides that if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner by way of the death of a person (former owner), the new owner is treated as having held the underlying interest of the former owner for the period the former owner held them. In this case 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.

Subsection 149-15(3) of the ITAA 1997 relevantly defines an 'ultimate owner' to include an individual. It does not include companies that pay dividends to their members, or trusts.

Subsection 149-15(2) of the ITAA 1997 defines an 'underlying interest' in a CGT asset as 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.

Subsection 149-15(1) of the ITAA 1997 defines majority underlying interests. It requires ultimate owners to hold more than 50% of the beneficial interests (either directly or indirectly through one or more interposed companies, trusts or partnerships) in the CGT asset and in any ordinary income that may be derived from the asset.

Subsections 149-15(4) and (5) of the ITAA 1997 provide that an ultimate owner has an indirect beneficial interest in a CGT asset of another entity if they would receive for their own benefit any capital or ordinary income distributed by the entity through interposed entities.

Under subsection 149-30(2) of the ITAA 1997, if the Commissioner is satisfied, or thinks it reasonable to assume, that the majority underlying interests in the asset have not changed up to a particular time, then subsections 149-30(1) and (1A) of the ITAA 1997 apply and the asset continues to be a pre-CGT Asset. Simply put, subsection 149-30(2) of the ITAA 1997 requires that the Commissioner has to be satisfied that the majority underlying interests in the assets have not changed, otherwise the asset is deemed to have been acquired at the time that the change in majority underlying interests in that asset happened.

In this case, as the CGT asset (the Property) acquired prior to 20 September 1985 is not held directly by individuals, the underlying interests in the Units need to be traced through intermediary entities to the ultimate owners for the whole period from and including 20 September 1985.

Taxation Ruling IT 2530 Income tax : capital gains : change in the underlying ownership of assets in a publicly traded unit trust : issue of new units in unit trusts and new shares in companies : interposed entities : calculation of change in majority underlying interests explains calculating changes in majority underlying interests:

10. If natural persons who immediately before 20 September 1985 held more than one half of the underlying interests in an asset continue to hold more than one half of the underlying interests at all times on and after that date, there will be no change in the majority underlying interests in the asset for the purposes of section 160ZZS. In these circumstances a change in the proportions in which the natural persons held interests in the asset would not have a bearing on the application of section 160ZZS. The following example illustrates this point:

Immediately before 20 September 1985 underlying interests in an asset of a company were owned by four natural persons in the following proportions -

A - 90%

B - 5%

C - 3%

D - 2%.

Following a change in the shareholding of the company after 20 September 1985, the underlying interests in the asset were owned by natural persons in the following proportions -

A - 1%

B - 2%

C - 48%

D - 0%

E - 49%.

The natural persons who owned underlying interests both immediately before 20 September 1985 and after the change in ownership were A, B and C. Immediately before 20 September 1985 A, B and C between them owned more than one half of the underlying interests (i.e., 98%). After the change A, B and C between them still owned more than one half of the underlying interests (i.e., 51%). Accordingly, more than one half of the underlying interests in the company's asset continued to be held by the same persons. Section 160ZZS would therefore not apply to deem the asset acquired by the company before 20 September 1985 to have been acquired on or after that date.

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(IT 2340) adopts a pragmatic approach of looking through interposed entities to determine which natural persons hold the beneficial interests for the purposes of section 160ZZS of the Income Tax Assessment Act 1936 (ITAA 1936), which preceded Division 149 of the ITAA 1997. Among other things, IT 2340 deals with issues regarding the application of section 160ZZS of the ITAA 1936 'to assets held by trustees of family trusts where the trustees are vested with discretionary powers as to distributions from the trusts.

Taxation Ruling IT 2340 reflects the position that section 160ZZS of the ITAA 1936, by its terms, necessarily supplants normal legal concepts of interests in assets. For the purposes of section 160ZZS, a beneficiary of a discretionary trust is treated as having a beneficial interest in the trust's assets. Likewise, a shareholder is treated for the purposes of section 160ZZS of the ITAA 1936 as having a beneficial interest in the company's assets.

Under this approach the Commissioner can 'look through' an entity to determine who are the natural persons who hold beneficial interests in assets:

2. The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like other provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets.

IT 2340 sets out the Commissioner's approach in respect of 'looking through' discretionary family trusts to determine whether majority underlying interests have been maintained in the assets of the trust, as follows:

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 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), 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.

However, if the trustee of a family discretionary trust appoints new beneficiaries who are not members of the particular family group, the Commissioner may consider that the underlying interests in the trust assets has changed. Paragraph 8 of IT 2340 states:

8. On the other hand where, by the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect a change of 50% or more in the underlying interests in the trust assets - such as where the members of a new family are substituted as recipients of distributions from the trust in place of persons who were formerly the object of such distributions - the section would have its intended application as described.

Application in these circumstances

The Commissioner accepts that in this case it is reasonable to assume that the majority underlying interests in the Property have been held by the same ultimate owners who held such interests immediately before 20 September 1985 for the purposes of Division 149 of the ITAA 1997 for the following reasons. Relevantly:

Shareholders in Company A

Company A was at all times from the CGT Date until the Sale Date entitled to receive a share of any dividends paid or capital distributed from the Rulee equivalent to the proportion of its shareholding in the Rulee.

However, neither the Rulee nor Company A, being companies, can be an ultimate owner of an interest in the Property for Division 149 purposes and therefore need to be looked through to determine the ultimate owners associated with the proportional interest in any dividends paid or capital distributed by the Rulee and then by Company A (noting that, as Company A owns shares in the Rulee and the Rulee owned the Property, we must look through these companies to determine the proportionate interest held by the shareholders of Company A in the Property). At the Sale Date, the shareholders in Company A were:

•         Individual A, with X ORD 1 shares;

•         Individual B, with X ORD 1 shares;

•         Trust A, with X ORD shares;

•         the Trust B, with X ORD shares; and

•         Individual C, with X ORD shares.

The Rulee has taken a conservative approach, based on the assumption that the ORD and ORD 1 shares are different classes of shares. On that basis, any capital and dividends paid by Company A can be paid to the ORD shareholders to the exclusion of the ORD 1 shareholders, and vice versa. As such, consideration of what portion of the ultimate owners through the shareholdings in Company A have maintained an underlying interest in the Property and any income derived from it since the CGT Date must be determined based on the lower of the percentage of the ultimate owners who have maintained such interests on the basis that the ORD shareholdings and the ORD 1 shareholdings taken separately.

That is, because, if dividends are paid to ORD shareholdings to the exclusion of ORD 1 shareholdings, or vice versa, the ultimate owners through the ORD 1 shares would be excluded from having an interest in the Property and income from it, as they would not receive any portion of the consecutive distributions of capital or dividends from the Rulee and then Company A, and vice versa.

Shares held by Individual A and Individual B

Shares that were bequeathed through Individual D's will, half of which (X ORD 1 shares) Individual D, in turn, received under Individual E's will.

In accordance with subsections 149-30(3) and (4) of the ITAA 1997, Individual D would have been taken to have held the underlying interests associated with that X ORD 1 shares bequeathed to them by Individual E from the time that Individual E was issued with those shares in XXXX. Individual A and Individual B would have each been taken to have held the X ORD 1 shares bequeathed to them by Individual D from that X ORD 1 shares bequeathed to them from Individual E from the time that Individual E held those shares.

Accordingly, since Individual E held those X ORD 1 shares from the CGT Date until their death and then Individual D held those shares until their death, and Individual A and Individual B continued to hold those shares until the Sale Date-Individual A and Individual B will each be taken to have maintained an underlying interest in the Property and the income from it from the CGT Date until the Sale Date, equivalent to that arising from their respective half of those X ORD 1 shares.

Both Individual A and Individual B would have been taken to have held the underlying interests associated with the X ORD 1 shares issued to Individual D in XXXX, that passed to them under Individual D's will, for the entire time that Individual D held those shares, pursuant to subsections 149-30(3) and (4) of the ITAA 1997.

Accordingly, Individual A and Individual B would have been taken to have maintained an underlying interest in the Property via those X ORD 1 shares from the CGT Date until the Sale Date.

That is because Individual D continuously held those X ORD 1 shares from when they were issued to them in XXXX until her death, at which point they were bequeathed to Individual A and Individual B, and they continuously held those shares until the Sale Date.

As such, Individual A and Individual B's respective underlying interests in the Property resulting from their respective holdings in Company A are included as forming part of the majority underlying interests held from the CGT Date until the Sale Date.

The X ORD 1 shares held in Company A by Individual A give rise to an ultimate owner who has held interests in the Property, or the income generated from it, from the CGT Date until the Sale Date.

Likewise, the X ORD 1 shares held in Company A by Individual B gives rise to an ultimate owner who has held interests in the Property, or the income generated from it from the CGT Date until the Sale Date.

Accordingly, all the ORD 1 shares result in ultimate owners who have maintained an underlying interest in the Property and any income from it from the CGT Date to the Sale Date.

Shares held by the Trust B

As the Trust B cannot be an ultimate owner, it must also be looked through to identify the individual ultimate owners with the proportion of the indirect interest in the Property and the income generated from it through the Company A shareholding in the Rulee.

Looking through the Trust B, the individual ultimate owners were, in broad terms Individual B, his wife, and their lineage. As these individuals constitute a broader group of individuals than those who held interests in the Property or the income generated from it through shareholdings in the Rulee at the CGT Date, they cannot be included for the purposes of calculating the majority underlying interests in the Property since the CGT Date. The trustee has the discretion to distribute income or capital from the asset to an entity other than Individual B.

Therefore the X ORD shares transferred to the Trust B by Individual B as at XXXX would not provide the ultimate owners of the Trust B with interests in the Property, or the income generated from it, since the CGT Date.

Accordingly, those X shares will not count towards the portion of the ORD shareholders who have maintained an underlying interest in the Property and any income derived from it from the CGT Date to the Sale Date.

Shares held by Individual C

Shares were bequeathed through Individual D's will.

Individual C is taken to have held the X ORD shares bequeathed to her under Individual D's will from the CGT Date until the Sale Date pursuant to subsections 149-30(3) and (4) of the ITAA 1997.

Individual C therefore maintained an indirect underlying interest in the Property, and the income from it at all times from the CGT Date until the Sale Date.

The X ORD shares held by Individual C gives rise to an ultimate owner who has held

interests in the Property, or the income generated from it from the CGT Date until the Sale Date.

Accordingly, those X ORD shares will count towards the portion of the ORD

shareholders that result in ultimate owners who have maintained an underlying interest in the Property and any income derived from it from the CGT Date to the Sale Date.

Shares held by the Trust A

The Trust A continually held X ORD shares in Company A from the CGT Date until the Sale Date. However, the Trust A cannot be an ultimate owner and it must be looked through to identify the ultimate owners.

The beneficiaries of the Trust A have not changed since the CGT Date, and the Trust A has continued to be administered for the benefit of Individual A's family.

In accordance with 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., it is accepted that the underlying interests in the Property can be traced through the X Company A ORD shares held by the Trust A's to ultimate owners of the Trust A.

Accordingly, the interests in the assets held through the X ORD shares in Company A held by Trust A will count towards the portion of the ORD shareholders that result in ultimate owners who have maintained an underlying interest in the Property and any income derived from it from the CGT Date until the Sale Date.

The Rulee has counted X% of the underlying interests in the Property associated with the ultimate owners of the shares held by Company A in the Rulee towards the majority underlying interest percentage at the relevant times (majority underlying interest percentage).

On a worst-case basis, if the ORD and ORD 1 shares are of the same class X% of the underlying interests in the Property associated with the ultimate owners of the shares held by Company A in the Rulee should count towards the majority underlying interests calculation. This still exceeds the position reached on treating the ORD and ORD 1 shares as separate classes. The Rulee has adopted the more conservative approach and used the X% figure of Company A's total shareholding in the Rulee as forming part of the Majority Group.

Trust A

The Trust A cannot be an ultimate owner and it must be looked through to identify the ultimate owners.

As mentioned above, the beneficiaries of the Trust A have not changed since the CGT Date, and it has always been administered for the benefit of Individual A's family.

Accordingly, in accordance with the Commissioner's administrative concession in IT 2340, it is reasonable for the Commissioner to assume the underlying interests in the Trust A's assets, including the shares it holds in the Rulee and hence the Property and the income from it, have not changed since the CGT Date.

Therefore, the underlying interests held by the individual beneficiaries of the Trust A in the Property, through the shares held by the Trust A in the Rulee, and the shares in the Rulee that were held by Individual D as bare trustee on behalf of the Trust A (discussed below), will count towards the majority underlying interests calculation.

Individual A

Individual A was the ultimate owner of an indirect interest in the Property, the capital of the Rulee and income from the asset at the CGT Date, through the shares that the Trust A held in Company A and it holding shares in the Rulee.

These interests in the Property were maintained until the Sale Date.

It follows that the acquisition of shares in the Rulee by Individual A in the circumstances described meant that the interests that those shares in the Rulee represent are taken to have been continually held until the Sale Date; and therefore Individual A was the ultimate owner of an underlying interest in the Property at all times from the CGT Date until the Sale Date.

As such, the underlying interests Individual A acquired are included in the majority underlying interests calculation.

Individual F / Trust C

Individual F's shares passed to Trust C pursuant to Individual F's will.

Trust C cannot be an ultimate owner and therefore needs to be looked through to the individual unitholders in Trust C, to identify the ultimate owners.

Although Trust C acquired the shares in the Rulee after the CGT Date, the individual original unitholders, by virtue of the operation of subsections 149-30(3) and (4) of the ITAA 1997, are taken to have held an indirect beneficial interest in the Property and the income equivalent to that of Individual F.

As Individual F held shares in the Rulee, and therefore an interest in the Property and the income from it, from the CGT Date until their shares were transferred to Trust C, then the original unitholders in Trust C, who continued to hold units in Trust C at the Sale Date, will be taken to have had an indirect beneficial interest in the Property and the income from it from the CGT Date until the Sale Date.

As X of the X units issued in Trust C remained with the original unitholders until the Sale Date, then those unitholders will be taken to have continually held an underlying interest in the Property and the income from it from the CGT Date until the Sale Date.

The X units transferred from Individual G to Individual H and Individual I, being a transfer during Individual G's life, will not allow them to stand in Individual F's shoes. As such, the percentage underlying interests associated with these unit holdings will not relate back to the CGT Date and therefore cannot count in the majority underlying interests calculation.

Accordingly, this means up to the date of death 100% of the shares held by Individual F will be counted towards the majority underlying interests calculation, but from the date of death X% of the shares held by Trust C in the Rulee will count towards the majority underlying interests calculation.

Individual J

Individual J held X shares in the Rulee at CGT Date. The shares that had accumulated in relation to those shares to the date of death passed under will to Individual K, Individual L, Individual M and Individual N. Each of those individuals retained those shares until the Sale Date.

In accordance with subsections 149-30(3) and (4) of the ITAA 1997, each of Individual K, Individual L, Individual M and Individual N will be taken to have held the beneficial interest in the Property and the income from it that is associated with the respective shareholding bequeathed to them from Individual J, from the same time Individual J held those shares.

Accordingly, they will each be taken to have had a continuous underlying interest in the Property and the income from it from the CGT Date until the Sale Date.

The underlying interests they each hold through the shares each of them received from Individual J's estate will therefore count towards the majority underlying interests calculation.

Individual E

Individual E held X shares in the Rulee at the CGT Date.

I. Bequest to Individual D

Upon Individual E's death, X shares were bequeathed to Individual D.

Individual D would have been taken pursuant to sections 149-30(3) and (4) of the ITAA 1997 to have held the underlying interests in the Property associated with those shares since the CGT Date, given Individual E held them at that date.

However, Individual D disposed of these X shares to Individual A in 2008. As Individual A had an underlying interest as a result of being a beneficiary of the Trust A, which had an interest in the asset from the CGT Date, the interests acquired from Individual D, ie the X shares, are counted towards the majority underlying interests calculation.

They have formed part of Individual A's shareholding and therefore are part of the Majority Group since then.

II. Bequest to Trust D

With respect to the other X shares, they were bequeathed to Individual O and then on Individual O's death to the Trust D. The Trust D retained those shares until the Sale Date.

As discussed above, subsections 149-30(3) and (4) of the ITAA 1997 applies to treat the ultimate owners, following consecutive bequests of shares in a company, as having held the underlying interests associated with those shares for the same period as both of the former owners.

The individual beneficiaries of the Trust D, namely Individual P and their children, are taken to have had an underlying interest in the Property and the income from it from the CGT Date until the Sale Date. Pursuant to subsections 149-30(3) and (4) of the ITAA 1997 they will be taken to have held those underlying interests from the times that Individual E, then following his death Individual O, and then following their death, the Trust D, held this particular X shares in the Rulee.

Accordingly, the underlying interests associated with those X shares will count in the majority underlying interests calculation.

Trust E

Trust E cannot be an ultimate owner and it must be looked through to identify the individual ultimate owners.

As mentioned above, the beneficiaries of the Trust E have not changed since the CGT Date, and that it has always been administered for the benefit of Individual Q's family.

Accordingly, in accordance with the Commissioner's administrative concession in IT 2340, the Commissioner assumes that the majority underlying interests in the trust assets, including the shares it holds in the Rulee and hence the Property and the income from it, have not changed since the CGT Date.

Therefore, the underlying interests held by the individual beneficiaries of the Trust E in the Property, through the shares held by the Trust E in the Rulee, will count in the majority underlying interests calculation.

Individuals R

Each of these individuals continuously held shares in the Rulee from the CGT Date until the Sale Date.

Accordingly, the underlying interests they each held in the Property through the shares in the Rulee will count in the majority underlying interests calculation.

Although Individual S passed away before the Sale Date, their shares did not pass to a new owner before the Sale Date. Notwithstanding, her underlying interests would continue to count even if the shares they held were transferred to new owners before the Sale Date as a result of the application of subsections 149-30(3) and (4) of the ITAA 1997.

Company B

As Company B is a company, its shareholding needs to be looked through to the

individual shareholders who held shares in Company B, and the individual shareholders and

beneficiaries of the companies and trusts that held shares in Company B (Company B Individuals), to determine whether any of the underlying interests held by the Company B Individuals can count in the majority underlying interests calculation.

The Company B Individuals whose indirect underlying interests in the Property, through their

shareholding in Company B and Company B's shareholding in the Rulee, can count towards the majority underlying interests calculation are those who are, as shown above, members of the Majority Group.

This is:

•         Individual C via their shareholding in Company A;

•         the individual beneficiaries of the Trust A via the Trust A's shareholding in the Rulee and its shareholding in Company A;

•         the individual beneficiaries of the Trust E via the Trust E's shareholding in the Rulee; and

•         One of the individuals from Individual R , Individual S, Individual J (as their shares continued to be held by the individual beneficiaries to whom they were bequeathed under her will until the Sale Date) and Individual F as to X% of her shareholdings (as X% of the units issued in Trust C were retained by Trust C's initial unitholders until the Sale Date).

Each of the shares issued in Company B have been limited to ordinary shares that have been fully paid at all times since the CGT Date. As such, the proportion of shares in Company B held by the Company B Individuals in the Majority Group will equate to the indirect portion of the underlying interests in the Property they have through the shares in the Rulee held by Company B.

For example, at the CGT Date, these individuals collectively held X of the shares on issue in Company B, counting only X% of the shares held by Company A and X% of the shares held by Individual F.

This equated to approximately X% of the shares on issue in Company B, being the Company B Individuals in the Majority Group proportion of shares on issue in Company B.

Accordingly, the Company B Individuals in the Majority Group held indirect underlying interests in the Property equivalent to X of the shares held by Company B in the Rulee at the CGT Date. Those underlying interests from those shares count towards the majority underlying interests calculation at that date.

The Rulee adopted the same methodology for calculating the underlying interests held by the Company B Individuals in the Majority Group through Company B's shareholding in the Rulee at the various dates.

However, in XXXX, Company B ceased to hold any shares in the Rulee when it was taken over by the Rulee, and the former shareholders in Company B were issued with additional shares in the Rulee as part of the takeover.

Accordingly, once the Company B takeover occurred, the indirect interests in the Property for the Company B Individuals in the Majority Group arising through holding shares directly or indirectly in Company B, ceased.

As such, since the Company B takeover, none of the COMPANY B Individuals have had an indirect interest in the Property through Company B holding shares in the Rulee. Rather, their underlying interests in the Property only arise through other shareholdings in the Rulee.

As those underlying interests in the Property through those other shareholdings are taken into account through those holdings, then Company B is not relevant for the purposes of the majority underlying interests calculation following the Company B takeover.

a)    Individual O

However, similar to Individual A, by virtue of being an individual beneficiary of the Trust A, as Individual A's son, Individual O nevertheless had a beneficial interest in the assets of the Trust A at the CGT Date. That is because Div 149 of the ITAA 1997 overrides the common law and treats an individual beneficiary of a discretionary trust as having an interest in the trust's assets.

Accordingly, despite Individual O only obtaining shares in the Rulee after the CGT Date, they would have been taken to have continually held underlying interests in the Property since the CGT Date. As such, all of the underlying interests Individual O gained from shares he subsequently received in the Rulee, in addition to the X shares bequeathed to them, would have formed part of the majority underlying interests calculation whilst they held those shares and subsequently since the Trust D held those shares.

Conclusion

The Majority Group of shareholders in the Rulee constitute a group of ultimate owners who have maintained majority underlying interests in the Property at all times from the CGT Date until to Sale Date.

The majority underlying interests in the Property have been maintained from the CGT Date to the Sale Date. Division 149 of the ITAA 1997 will not apply to treat the asset as having been acquired after 20 September 1985. It will remain a pre-CGT asset for the company.

Question 2

Summary

Any capital gain or capital loss arising from CGT event A1 happening to the disposal of the Property is disregarded for as the Property is a pre-CGT asset for the purposes of section 104-10 of the ITAA 1997.

Detailed reasoning

Under subsection 104-10(1) of the ITAA 1997, CGT event A1 happens if you dispose of a CGT asset. Under subsection 104-10(2) you dispose of a CGT asset if a change of ownership occurs from you to another entity.

However, any capital gain or loss pursuant to CGT event A1 is disregarded where the CGT asset was acquired before 20 September 1985 (subsection 104-10(5) of the ITAA 1997).

In this case, the Property is a CGT asset and CGT event A1 happened when the Rulee sold the Property (section 104-10 of the ITAA 1997).

The Commissioner accepts that in these circumstances Division 149 of the ITAA 1997 will not apply to treat the Property as having been acquired after 20 September 1985 (i.e. it remained a pre-CGT asset).

Accordingly, any capital gain or loss from the sale of the Property will be disregarded for the purposes of section 104-10 of the ITAA 1997.