Edited version of private advice

Authorisation Number: 1052171586364

Date of advice: 3 October 2023

Ruling

Subject: Division 149 - majority underlying interests

Question 1

With reference to subsection 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997), is the Commissioner satisfied, or thinks it is reasonable to assume, that at all times on and after 20 September 1985 to present, that the majority underlying interests in the Land were had by ultimate owners who had majority underlying interest in the Land immediately before 20 September 1985?

Answer

Yes

This ruling applies for the following period

The Income Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.    The Company was incorporated before 20 September 1985.

2.    Individual A and Individual B were appointed as the first directors of the Company at incorporation.

3.    The Company owns land (Land) that was purchased before 20 September 1985 (i.e., it is a pre-CGT asset).

The Shareholdings in the Company immediately before 20 September 1985

4.    At incorporation, the shares in the Company were held in the following manner:

5.    Individual C and Individual D are the children of Individual A and Individual B.

6.    The Class 'A' share has dividend and capital rights and also provides Individual A with Governing Director rights which include the right to cast three times the number of all votes capable of being cast at a meeting of the Company.

7.    In addition, as long as the Class 'A' share (or the Class 'B' share) has the Governing Director rights attached, the Company may, notwithstanding the provisions of any other Article but subject to the rights as to dividends, declare dividends of varying amounts on such classes of shares as it shall from time to time determine and shall have power to declare a dividend on any one or more class of shares to the exclusion of another class of shares not being preference shares.

8.    The Class 'B' share has dividend and capital rights and also provides Individual B with the 'Governing Director' rights following the death of Individual A.

9.    The Class 'D' shares are ordinary shares and have rights to vote, capital and dividends (subject to the discretion of the Class 'A' shareholder).

Changes in the Company's shareholdings since 19 September 1985

10.  After 19 September 1985, Individual D transferred their XXX Class 'D' shares in the Company to Individual C.

11.  No payment was required to be paid by Individual C for the transfer of the Class 'D' shares.

12.  The shares in the Company were held in the following manner after the transfer of the Class 'D' shares and are still currently held on this basis:

Proposed Sale of the Land

13.  The Company is considering selling the Land and, accordingly, seeks confirmation that Division 149 of the ITAA 1997 will not apply, such that the Land is still taken to be acquired before 20 September 1985.

Assumptions

14.  Each Class 'A' share, Class 'B' share and Class 'D' share on issue in the Company has the same rights in respect of distributions of capital from the Company.

15.  In respect to the shares on issue in the Company (of any class), there will be no changes to the shareholders, the nature of their shareholdings and the rights attached to the shares during the Ruling Period.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 subsection 149-15(1)

Income Tax Assessment Act 1997 subsection 149-15(2)

Income Tax Assessment Act 1997 subsection 149-15(3)

Income Tax Assessment Act 1997 subsection 149-30(1)

Income Tax Assessment Act 1997 subsection 149-30(2)

Reasons for decision

All legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

Summary

1.    The Commissioner is satisfied, or thinks it is reasonable to assume, that at all times on and after 20 September 1985 to the present, that the majority underlying interests in the Land were had by ultimate owners who had majority underlying interest in the Land immediately before 20 September 1985.

Detailed reasoning

2.    Division 149 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.

3.    Under subsection 149-30(1), 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.

4.    Subsection 149-15(1) provides that 'majority underlying interests' in a CGT asset consist 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.

5.    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 (per subsection 149-15(2)).

6.    An ultimate owner is defined in subsection 149-15(3) to include an individual.

7.    Under subsection 149-30(2), 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 149-30(1A) apply as if that were in fact the case and the asset continues to be a pre-CGT asset.

8.    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 provides the following (in paragraph 10) in respect of how to calculate changes in the 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.

9.    ATO Interpretative Decision ATO ID 2011/101 Income Tax Capital Gains Tax: Division 149 majority underlying interests - no new shareholders provides that the majority underlying interests in the pre-CGT assets of a company are had by ultimate owners who had such interests in the asset immediately before 20 September 1985 if, all the shares in the company carry a discretionary right to dividends but there are no new shareholders in the company. This ATO ID confirms that, in such a situation, the majority underlying interests in an asset continue to be had by the ultimate owners who had such interests in the asset immediately before 20 September 1985, given that there has been no change, on or after 20 September 1985, to the membership group that collectively comprise those who would receive for their benefit any of a dividend if the company were to pay the dividend.

10.  In contrast, ATO ID 2011/107 Income Tax Capital Gains Tax: Division 149 majority underlying interests - new shareholder looks at the Subdivision 149-B consequences when a company, where all the shares carry a discretionary right to dividends, issues a new share with discretionary rights to dividends to a new shareholder after 19 September 1985. In this case, the ATO ID concludes that the majority underlying interests in the asset are not had by ultimate owners who had such interests in the asset immediately before 20 September 1985. This is because, due to the discretionary right to dividends which all shares in the company carry, the possibility exists that the ultimate owners, who between them collectively had majority underlying interests in the asset immediately before 20 September 1985, may receive less than 50% of the ordinary income that may be derived by company from the asset.

11.  It is, therefore, evident from the above that, a company may have different classes of shares on issue, but this will not necessarily have negative implications in regards to satisfying the requirements of subsection 149-30(1).

Application to the current circumstances

12.  The Commissioner considers that, in these circumstances, it is reasonable to assume that the majority underlying interests in the Land have been had by the same ultimate owners who had such interests immediately before 20 September 1985 for the purposes of Division 149 for the following reasons:

(a)          Individual A has continuously held their Class 'A' share in the Company since before 20 September 1985 to the present with the Governing Director rights attached.

(b)          Since before 20 September 1985 to the present, all of the shares in the Company, of which there are various classes, have been held by Individual A and members of their immediate family and no new shareholder has gained the right (or potential right) to any ordinary income and capital that may be derived from the Land (whether directly or indirectly).

(c)           Based on the rights attached to the different classes of shares in the Company, and the pooling concept outlined in IT 2530, in broad terms, Individual A, Individual B and Individual C have collectively held more than 50% of the shares in the Company (which have rights to capital distributions) at all times since before 20 September 1985.