Edited version of private advice

Authorisation Number: 1052103633469

Date of advice: 30 March 2023

Ruling

Subject: Pre-CGT status of land held by a company which issued bonus shares

Question 1

Does section 149-30 of the ITAA 1997 apply to the Land held by Company A such that it is no longer a pre-CGT asset?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commenced on:

1 July 19XX

Relevant facts and circumstances

1.    Company A was incorporated prior to 20 September 1985.

2.    All the shares of Company A have been and remain fully paid ordinary class shares.

3.    All the shares of Company A's shareholders (past and present) are as follows:

•         Individual A

•         Individual B is Individual A's sibling.

•         Individual C is Individual A and Individual B's father.

•         Individual D is Individual A and Individual B;s uncle.

•         Individual E is Individual A and Individual B's mother.

4.    On incorporation date, Company A had xxx ordinary class shares which were allotted to Individual C and Individual D in equal shares.

5.    Subsequent to incorporation but prior to 20 September 1985, Company A allotted a further xxx ordinary class shares i.e.xxx shares to Individual E and xxx shares to Individual A.

6.    Subsequent to incorporation but prior to 20 September 1985, Individual C died and Individual C's shares were transferred from the estate of Individual C to Individual A (in accordance with their will).

7.    Subsequent to incorporation bur prior to 20 September 1985, Individual D died and Individual D's shares were transferred from the estate of Individual D to Individual A (in accordance with their will).

8.    In April 1987, Company A resolved to allot additional fully paid shares to the shareholders as a 'bonus share issue from reserves'. In this regard:

•         Prior to the issue of bonus shares, Company A owned farming land (the Land). Company A acquired the Land prior to 20 September 1985.

•         Company A revalued the Land and credited the xxx to its asset revaluation reserve.

•         Company A then resolved to issue xxx shares from its asset revaluation reserve to each of the existing shareholders at the time, pro-rated to their shareholding at the time. Specifically:

­   Individual A was allocated an additional xxx ordinary shares and

­   Individual E was allocated an additional xxx ordinary shares.

The share issue was undertaken to equate the number of issued shares with the market value of the Land at the time.

9.    Post 20 September 1985, Individual E died, and her shares were held in Individual A's name as trustee for Individual E's estate.

10.  A number of years later, Individual E's shares were transferred from the estate of Individual E and allocated to the beneficiaries: xxx shares to Individual A and xxx shares to Individual B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 Section 149-10

Income Tax Assessment Act 1997 Section 149-30

Reasons for decision

Company A was incorporated on 20 April 1956.

Company A acquired the Land prior to 20 September 1985.

Subdivision 149-B of the ITAA 1997 provides when an asset of a non-public entity stops being a pre-CGT asset.

Subsection 149-30(1) provides that an asset stop being a pre-CGT asset at the earliest time when 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.

149-30(1)

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.

Hence, to determine if the land held by the Company A remains a pre-CGT asset in 2023, it is necessary to determine that the majority underlying interests in the Land were had by the ultimate owners who had majority underlying interests in the Land immediately before 20 September 1985.

Subsection 149-15(3) provides that an ultimate owner includes an individual.

Subsection 149-15(1) provides the definition for the majority underlying ownership and is as follows:

149-15(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.

149-15(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.

Immediately before 20 September 1985, Individual A held more than 50% of the shares in Company A and Individual E held less than 50% of the shares in Company A. Hence, Individual A and Individual E together held 100% of the underlying ownership of Company A immediately prior to 20 September 1985.

The shareholding of the Company A remained the same from immediately before 20 September 1985 to just prior to the issue of the bonus shares (which occurred after 20 September 1985). Hence, Individual A and Individual E together continually held 100% of the underlying ownership of Company A from immediately before 20 September 1985 just prior to the issue of the bonus shares.

When Company A resolved to issue the bonus shares from its asset revaluation reserve to each of the existing shareholders at the time, pro-rated to their shareholding at the time, Individual A and Individual E were allocated additional shares. As no other shareholder was issued bonus shares, Individual A and Individual E together continued to hold 100% of the underlying ownership of the Company A. Individual A continuing to be the majority shareholder with more than 50% holding in Company A.

The shareholding changed again when Individual E died, whereupon her shares were transferred to her children: following which Individual A now holds more than 80% of the shares in Company A.

Hence, Individual A has always had and continues to have more than 50% shareholding in the company.

Accordingly, Individual A's 'beneficial interest' in the Land, held indirectly as an 'ultimate owner' through his shareholding in the company, has always exceeded 50%.

It follows that the majority underlying ownership in the Land has been maintained. Therefore, there has not been a change in the ultimate owners who hold the majority underlying interests in the Land. Division 149 of the ITAA 1997 will not apply to treat the Land as a post-CGT asset.