Edited version of private advice

Authorisation Number: 1052088144367

Date of advice: 17 February 2023

Ruling

Subject: Capital gains tax

Question 1

Has the land acquired by XXXX Pty Ltd (the Company) before 20 September 1985 stopped being a pre-CGT asset because of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are any of the dwellings that were constructed on the land before 20 September 1985 separate CGT assets to the land pursuant to section 108-55 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20xx

The scheme commences on:

1 July 20yy

Relevant facts and circumstances

The Green Family:

1.         Mr and Mrs Green were married and together had four children, being:

a.         Blue

b.         Yellow

c.          Red, and

d.         Orange.

2.         Of the children of Mr and Mrs Green, only Blue had children, who are:

a.         A Blue

b.         B Blue

c.          C Blue

d.         D Blue

e.         E Blue and

f.           F Blue.

3.         Blue passed away in 19xx.

Green Family Trust

4.         In 19zz, the Green Family Trust was settled. The Trust Deed for the Green Family Trust provides that half the income of the trust funds be paid to Red, with the other half other income be paid to Yellow.

5.         The Deed of Settlement also provides that if there shall be a failure of the trustee in respect of the trust funds, the Trustee shall pay the income thereof to Mr Green and, upon his death, to Mr Green's children in such manner as provided for in his Will. The shares in XXXX Pty Ltd (explained below) were distributed to Mr Green's children upon his death.

XXXX Pty Ltd (the Company):

6.         In 19aa, XXXX Pty Ltd (the Company) was incorporated. At no point in time has the company been a public company for the purposes of former subsection 160ZZZRR(1) or section 103A of the Income Tax Assessment Act 1936 (ITAA 1936).

The Land:

7.         Prior to 20 September 1985, the Company acquired land. The land has four dwellings on them which were all constructed prior to 20 September 1985.

Shareholding of the Company:

8.         Prior to 20 September 1985, the shareholding of the Company was as follows:

a.         XXXX shares held by the Green Family Trust

b.         XXX shares held by the A Blue Family Trust

c.          XXX shares held by the B Blue Family Trust

d.         XXX shares held by the C Blue Family Trust

e.         XXX shares held by the F Blue Family Trust

f.           XX shares held by A Blue

g.         XX shares held by B Blue

h.         XX shares held by C Blue

i.           XX shares held by D Blue

j.           XX shares held by E Blue, and

k.          XX shares held by F Blue.

9.         The Company has only had ordinary shares at issue at all times after 20 September 1985.

10.       Upon the death of Mr and Mrs Green's last surviving daughter in 19bb, the Green Family Trust vested and its shareholding in the Company was distributed as follows:

a.         XXX shares to A Blue

b.         XXX shares to B Blue

c.          XXX shares to C Blue

d.         XXX shares to D Blue

e.         XXX shares to E Blue, and

f.           XXX shares to F Blue.

11.       B Blue passed away in 20xx. Their Estate is still in administration and the Will did not give specific provision for the 2,811 shares they held in the Company. Therefore, B Blue's shares will be dealt with under the provisions of the Will regarding the division and distribution of the balance of their Estate. These provisions stipulate that the Primary Beneficiaries of their Will, being their four children, will receive the shares in equal parts.

12.       The current shareholders of the Company are as follows:

A Blue Family Trust:

13.       In 19cc, a discretionary trust known as the A Blue Family Trust was settled by deed.

14.       Broadly, clause 2 (a) of The Trust Deed provides that, during the life of A Blue's life, the trustee has the absolute discretion to pay or apply the income of the trust fund towards the maintenance, education or benefit of A Blue, Mrs Blue, or any of the children, grandchildren of Mr Blue. As such, at all times, the Trust was administered for the benefit of the members of A Blue's family.

15.       The trustee of the A Blue Family Trust acquired the shares in the Company prior to 20 September 1985.

B Blue Trust:

16.       In 19cc, a discretionary trust known as the B Blue Trust was settled by deed.

17.       Broadly, clause 2 (a) of The Trust Deed provides that, during the life of B Blue, the trustee has the absolute discretion to pay or apply the income of the trust fund towards the maintenance, education or benefit of B Blue, Mrs Blue, or any of the children, grandchildren of Mr Blue. At all times, the Trust was administered for the benefit of the members of B Blue's family.

18.       The trustee of the B Blue Trust acquired the shares in the Company prior to 20 September 1985.

19.       In accordance with Trust Deed, the Trust vested upon B Blue's death in 20yy and the trustee distributed all of the trust fund's assets, including the shares in the Company, to the Estate of B Blue's.

C Blue Family Trust and F Blue Family Trust:

20.       The C Blue Family Trust and F Blue Family Trust are testamentary trusts established under the Will of Mr Blue. Both Trusts are discretionary trusts and have been administered for the benefit of the respective family members of C Blue and F Blue.

Relevant legislative provisions

Former section 160ZZS of the Income Tax Assessment Act 1936

Subsection 108-55(2) of the Income Tax Assessment Act 1997

Division 149 of the Income Tax Assessment Act 1997

Reasons for Decision

Question One:

Has the land acquired by the Company before 20 September 1985 stopped being a pre-CGT asset because of Division 149 of the ITAA 1997?

WHEN AN ASSET STOPS BEING A PRE-CGT ASSET

1.         Broadly, former section 160ZZS of the ITAA 1936 was an anti-avoidance provision aimed at preventing the circumvention of capital gains tax on assets acquired after 19 September 1985. Where a taxpayer acquired assets prior to 20 September 1985 and, sometime after that date, the underlying ownership of the asset (for instance, for an asset held by a company whose beneficial ownership in 50% or more of its shares has changed) the provision operated to deem the assets to have been acquired after 19 September 1985.

2.         Former section 160ZZS of the ITAA 1936 applied until 30 June 1998.

3.         On 22 June 1998, Division 149 was introduced and contains similar concepts to former section 160ZZS of the ITAA 1936.

What is a pre-CGT asset:

4.         Section 149-10 provides that an asset will only be a pre-CGT asset if:

a.         the asset was acquired by the entity prior to 20 September 1985

b.         the entity was not, immediately before the start of the year ended 30 June 1999, taken to have acquired the asset on or after 20 September 1985 under:

i.          former subsection 160ZZS(1) of the ITAA 1936, or

ii.         Subdivision C of Division 20 of former Part IIIA of the ITAA 1936[1], and

c.          The asset has not stopped being a pre-CGT asset of the entity because of Division 149.

5.         Therefore, relevant to the current case, an asset will be a pre-CGT asset if acquired before 20 September 1985 and did not stop being a pre-CGT asset due to either former subsection 160ZZS(1) of the ITAA 1936 or Division 149 of the ITAA 1997.

Former subsection 160ZZS(1) of the ITAA 1936:

6.            Former subsection 160ZZS(1) of the ITAA 1936 provided that:

For the purposes of the application of this Part in relation to a taxpayer, an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interest in the asset.

7.         The meaning of the term 'majority underlying interests' is defined in former subsection 160ZZRR(1) as:

...in relation to an asset, means more than one-half of:

(a) the beneficial interests that natural persons hold (whether directly or indirectly) in the asset; and

(b) the beneficial interests that natural persons hold (whether directly or indirectly) in any income that may be derived from the asset.

8.         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) provides guidance on the interpretation of former section 160ZZS of the ITAA 1936 and the meaning of majority underlying interests. As the former provisions were concerned with the interests held by natural persons, paragraph 2 of IT 2340 explains that the policy intent of the former provision permits and requires that chains of companies, partnerships and trusts are to be looked through in order to determine whether there has been a change in the interests held by natural persons in the particular asset.

9.         Further, paragraph 5 of IT 2340 states:

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.

10.      Paragraph 6 of IT 2340 provides that section 160ZZS would not apply in the example of a trustee administering a trust fund for the benefit of a particular family group purely because the trustee exercises its discretion with regards to the amounts which are distributed and to which particular beneficiaries. Paragraph 7 then provides that in such an example, the Commissioner would find it reasonable to find that the majority underlying interests in the trust assets would not change for the purposes of subsection 160ZZS(1). In these types of circumstances, paragraph 7 further states that "[o]n 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".

11.      In contrast, paragraph 8 of IT 2340 explains that where a trustee exercises a power to amend the potential beneficiaries of a trust by deed such that there is in practical a change of 50% or more in the underlying interests in the trust assets (for instance, where members of a new family are substituted as potential beneficiaries in place of the original potential beneficiaries who were members of different family group) section 160ZZS would apply.

When an asset stops being a pre-CGT asset pursuant to Division 149:

12.      The meaning of the term 'majority underlying interests' in a CGT asset is defined in subsection 149 -15(1) as:

a.         more than 50% of the beneficial interests, either directly or indirectly, that the ultimate owners have in the asset, and

b.         more than 50% of the beneficial interests, either directly or indirectly, that the ultimate owners have in the ordinary income derived from the asset.

13.      Subsection 149-15(2) provides that the term 'underlying interest' in a CGT asset as a beneficial interest in the asset or in any ordinary income that may be derived from the asset, held either directly or indirectly by the ultimate owner.

14.      Moreover, subsection 149-15(3) explains that an 'ultimate owner' is:

a.         an individual

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

c.         the Commonwealth, State or Territory

d.         a municipal corporation or local governing body, or

e.         the government of a foreign country or part of a foreign country.

f.          The government of a foreign country, or part of a foreign country.

15.      Subsection 149-15(4) states that:

An ultimate owner indirectly has a beneficial interest in a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if:

(a)    the other entity were to distribute any of its capital; and

(b)    the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner.

16.      Similarly, with regards to the ordinary income of the CGT asset, subsection 149-15(5) states that:

An ultimate owner indirectly has a beneficial interest in ordinary income that may be derived from a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of a dividend or income if:

(a)   The other entity were to pay that dividend, or otherwise distribute that income; and

(b)   The dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner.

17.      Subsection 149-30(1) provides that:

The 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.

18.      Broadly, subsections 149-30(3) and (4) provide 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 marriage breakdown rollover or because of the death of a 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.

19.      ATO Interpretative Decision ATO ID 2003/779 Income Tax CGT: majority underlying ownership and deceased estate - continuity of interest during the period of administration (ATOID 2003/779) considers whether a beneficiary of a deceased estate will be treated as having a beneficial interest in the assets of the estate before it has been fully administered for the purposes of determining the continuity of underlying interests pursuant to subsections 149-30(3) and (4). ATOID 2003/779 explains that:

a.         during the period of administration of a deceased estate, the beneficiaries are not considered to be presently entitled to the income of the estate. Rather, the income is treated to be that of the legal personal representative during the period of administration and is therefore not income of the beneficiaries.[2]

b.         subsection 128-15(2) provides that a legal personal representative or beneficiary is taken to have acquired the assets of a deceased on the day of their death. As such, once the beneficiary has taken ownership of the assets, the beneficiary is taken to have owned the assets of the deceased upon the day of their death for CGT purposes.

c.          to give subsections 149-30(3) and (4) their intended effect, it is necessary for subsection 149-30(1) to apply as if the beneficiary had beneficial interests in the assets of the deceased estate from the date of death until the date the estate is fully administered. Without such an interpretation, subsections 149-30(3) and (4) could never achieve their purpose, and

d.         as a result of the above, it is necessary to treat a beneficiary of a deceased estate as having a beneficial interest in the assets of the estate before it has been fully administered in order for subsections 149-30(3) and (4) to have effect.

APPLICATION TO YOUR CIRCUMSTANCES

Asset was acquired by the entity prior to 20 September 1985:

20.      Prior to 20 September 1985, the Company acquired the land and paragraph 149-10(a) is satisfied.

21.      As the Company is not a public company, in order for the land to retain its pre-CGT status, the Company must not be taken to have acquired the land pursuant to former subsection 160ZZS(1) after 20 September 1985 and the land did not stop being a pre-CGT asset in accordance with Division 149.

Asset taken to have been acquired on or after 20 September 1985 pursuant to former subsection 160ZZS(1) of the ITAA 1936:

22.      In order for subparagraph 149-10(b)(i) to be satisfied the Company must not have been taken immediately before the start of the 1998-99 income year to have acquired the land on or after 20 September 1985 pursuant to former subsection 160ZZS(1) of the ITAA 1936. Therefore, the first factor that needs to be considered in order to establish whether former subsection 160ZZS(1) of the ITAA 1936 would apply is whether immediately prior to the 1998-99 income year there was a change in the underlying majority ownership interests in the Company such that the land were taken to be acquired prior to 20 September 1985.

23.      Prior to 20 September 1985, the shareholding of the Company was as follows:

a.         XXXX shares held by the Green Family Trust

b.         XXX shares held by the Red Family Trust

c.          XXX shares held by the Yellow Family Trust

d.         XXX shares held by the Blue Family Trust

e.         XXX shares held by the Orange Family Trust

f.           XX shares held by A Blue

g.         XX shares held by B Blue

h.         XX shares held by C Blue

i.           XX shares held by D Blue

j.           XX shares held by E Blue, and

k.          XX shares held by F Blue.

24.      Subsequent to 20 September 1985 and due to the passing of a number of family members, the shareholding in the Company has changed over time. Therefore, it is necessary to determine whether there has been a change in the majority underlying interests in the Company in order to establish whether the land will be deemed to be post-CGT assets.

Change in the Company's shareholding as a result of the vesting of the Green Family Trust:

25.      The first change in the shareholding of the Company occurred in 19xx as a result of the vesting of the Green Family Trust and, as a result, the provisions in former section 160ZZS need to be considered to determine whether there has been a change in the underlying majority interests.

26.      At all times, the Green Family Trust had been administered for the benefit of Mr Green's family members. Upon vesting of the Green Family Trust, the XXXX shares held in the Company by the Trust were distributed as follows:

a.         XXX shares to A Blue

b.         XXX shares to B Blue

c.          XXX shares to C Blue

d.         XXX shares to D Blue

e.         XXX shares to E Blue, and

f.           XXX shares to F Blue.

27.      Consequently, due to the vesting of the Green Family Trust, XXXX shares (being 49.9964%) of the XXXXX issued shares in the Company were transferred to the six children of Blue. As Blue's children held shares in the Company prior to the vesting of the Green Family Trust, the transfer of the XXXX shares between them did not change the majority underlying interest but purely added to Blue's children's existing shareholdings. The Commissioner considers it reasonable to conclude that the transfer of the shares at the vesting of the Green Family Trust, did not change the majority underlying interests in the Freehold Properties for the purposes of subsection 160ZZS(1).

Asset stopped being a pre-CGT asset pursuant to Division 149 (subparagraph 149-10(c))

28.      As the subsequent changes to the Company's shareholding occurred after the 1998-99 income year, it is then necessary to consider whether Division 149 will apply such that the land ceased to be pre-CGT assets. That is, it is necessary to determine whether there has been a change in more than 50% of the majority underlying interest in the land.

Change in the Company's shareholding as a result of the vesting of the B Blue Family Trust:

29.      The second change in the Company's shareholding occurred due to the passing of B Blue in 20yy. In accordance with the terms of the trust deed of the B Blue Family Trust, the shares held by the Trust were distributed by the trustee to the Estate of B Blue. As such, the total amount of shares held by the Estate represent only 15% of the shareholding of the Company. Consequently, the amount of shares held by the Estate is not significant enough to represent a more than 50% change of the majority underlying interests in the land and subparagraph 149-10(c) will not be satisfied.

Question 2:

Are any of the dwellings that were constructed on the land before 20 September 1985 separate CGT assets to the Freehold Properties pursuant to section 108-55 of the ITAA 1997?

WHEN IS A BUILDING A SEPARATE ASSET FROM LAND?

30.      Where a building or structure is constructed on land that is acquired before 20 September 1985, subsection 108-55(2) provides that the building or structure will be taken to be a separate CGT asset if:

a.         the contract for the construction of the building or structure was entered into on or after 20 September 1985, or

b.         there is no contract, construction commenced on or after 20 September 1985.

Application to your circumstances:

31.      Prior to 20 September 1985, the Company acquired the land. Also prior to 20 September 1985, the land had four dwellings constructed upon it. Consequently, in accordance with subsection 108-55(2) of the ITAA 1997, the four dwellings will not be taken to be separate CGT assets to the underlying land on which they are built.

[1] Subdivision C of Division 20 of former Part IIIA of the ITAA 1936 relates to public companies, which is not relevant to this case.

[2] See paragraph 9 of Taxation Ruling IT 2622.