Edited version of private advice

Authorisation Number: 1052194692927

Date of advice: 21 November 2023

Ruling

Subject: CGT - majority underlying interest

Question

Is the Commissioner satisfied, or does the Commissioner think it reasonable to assume, that the majority underlying interests in the asset have been held by the same ultimate owners, the individuals, at all times from immediately before 20 September 19YY to the disposal of the property?

Answer

Yes.

This private ruling applies for the following period:

Year ended 30 June 20YY

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

The company was incorporated prior to 20 September 19YY and preference shares were issued to individual A, individual B and Individual C. Other share classes on issue were added per special resolution prior to 20 September 19YY.

The officeholders of the company over time were individual B, individual F, individual E and individual G.

Individual C died in 20YY and all assets were left to Individual B

Individual B died in 20YY. Probate was not granted until 20YY. All of the assets of individual B were left to individual E.

The company acquired a property prior to 20 September 19YY. The property was sold in the 20YY financial year.

Shareholdings in the company and rights attached to each share class

The rights of the shares per the memorandum and articles are as follows:

•         A class, B class, C class, D class, E class, F class and G class:

o   Right to a discretionary dividend to the exclusion of other classes

o   No voting rights

o   Right to a return of excess capital on a winding up after the right of preference shares have been exhausted

•         Preference shares:

o   Cumulative dividend of X% per annum and one vote per share at a general meeting

o   Only shares with voting right at a general meeting

o   Priority to return of the paid-up amount and unpaid cumulative dividends on a winding up

In 19YY there were a number of transfers including 1 preference share being transferred from the Estate of individual A to individual B

In 19YY individual I sold X shares to individual B.

Individual H sold X shares to family in 20YY.

In 20YY individual I sold X shares to individual E and individual D.

In 20YY upon the death of individual F, all of their shares were transferred to individual D.

The shares held by individual B were transferred to individual D upon their death.

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 149-30(1)

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

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

Income Tax Assessment Act 1997 subsections 149-30(3)

Income Tax Assessment Act 1997 subsections 149-30(4)

Reasons for decision

Summary

In this case, the Commissioner is satisfied that the majority underlying interest in the asset has been held by the same ultimate owners at all times from immediately before 20 September 19YY till the disposal of the property.

Detailed reasoning

Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that pre-CGT assets will be deemed to be post-CGT where there has been a change in the majority underlying ownership of the assets.

Subsection 149-15(1) of the ITAA 1997 provides that majority underlying interests in a CGT asset consists 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.

Subsection 149-30(1) of the ITAA 1997 provides that an 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 19YY.

Subsection 149-30(2) of the ITAA 1997 provides that if the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 19YY and before a particular time majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day, subsections 149-30(1) and 149-30(1A) of the ITAA 1997 apply as if that were in fact the case.

Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provide that if an ultimate owner (the new owner) has acquired a percentage (the acquired percentage) of the underlying interests in the asset because of the death of a person (the former owner), the new owner is treated as having held the former owner's interests in the assets for the period the former owner held those interests.

Application to the circumstances

In this case, upon the death of individual C their pre-CGT share transferred to individual B. Further upon the death of individual B and individual F their pre-CGT shares transferred to individual E. In accordance with subsections 149-30 (3) and 149-30(4) of the ITAA 1997, individual E, as the new owner, is treated as having held the former owners interests in the assets for the period the former owner held those interests.

Individuals B, C, E and F owned more than 50% of the shares in the company prior to 20 September 19YY. There have been no dividends paid from the company at any time. The Commissioner is satisfied that the majority underlying interest in the asset has been held by the same ultimate owners at all times from immediately before 20 September 19YY till the disposal of the property.