Edited version of private advice

Authorisation Number: 1052200027630

Date of advice: 04 December 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 1985 and continues to be a pre-20 September 1985 asset?

Answer

Yes.

This private ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The company was incorporated prior to 20 September 1985 and A class shares were issued to individual A and individual B.

The company acquired a property prior to 20 September 1985.

Further A class and ordinary shares were issued to individual A, individual B, individual C and individual D.

Individual A died in 19XX and all shares were left to individual C and D. Individual C transferred all shares to Individual D.

Individual B died in 19XX and all shares were left to individual C and D.

The shareholders became individual D and individual E.

In 19XX individual D and individual E separated and individual E transferred all their shares to individual D.

Shares were purportedly issued for B class shares. Legal advice sought provided that no B class shares validly issued.

In 2010 the company passed a special resolution to amend the memorandum by replacing it with a constitution with ordinary, A, B, C, D, E, F, G H and I class redeemable preferences shares.

Shareholdings in the company and rights attached to A class and ordinary class shares

The Memorandum

The rights of the shares per the Memorandum are as follows:

•         A class

o   non-participating, preferential as to return of capital

o   carry a fixed non-cumulative preferential dividend of five percent

o   entitled to X votes per share at general meetings

•         Ordinary shares

o   entitled to one vote per share

The memorandum is silent on the other rights attached to an ordinary share.

The constitution

The rights of the shares per the constitution are as follows:

•         Ordinary shares

o   entitled to one vote for each share held

o   the right to payment of all dividends, distributions, bonuses and other profits

o   upon a reduction of capital or winding up of the company to participate with the other holders of ordinary shares in the surplus assets of the company.

•         A class shares

o   entitled to one vote for each share held

o   no right to dividend or distribution of capitalised profits

o   subject to the rights of the "I" class redeemable preference shares, upon a reduction of capital or winding up of the company the right, in priority of all other shares of the company, to return of paid up capital to a value not exceeding the amount defined in the terms of issue of each of such shares but shall not carry the right to any further participation in the surplus profits or assets of the company

In 19XX individual E transferred their shares to individual D and individual F acquired X shares to hold on trust for individual D.

In 19XXindividual F transferred their shares to individual C to hold on trust for individual D and individual C transferred their shares to individual G to hold on trust for individual D.

In 20XX individual G transferred their shares to individual D.

In 20XX upon the death of individual D, all of their shares were transferred to individual H and I.

Dividends were paid to individual D in 19XX, 20XX, 20XX, 20XX, 20XX and individual D's estate in 20XX and 20XX.

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 1985 and continues to be a pre-20 September 1985 asset.

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 1985.

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 1985 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 marriage breakdown of individual D and individual E, individual E's pre-CGT shares transferred to individual D. Further, upon the death of individual D their pre-CGT shares transferred to individual H and individual I. In accordance with subsections 149-30(3) and 149-30(4) of the ITAA 1997, individual H and individual I, as the new owners, are treated as having held the former owners interests in the assets for the period the former owner held those interests.

Individual D owned more than 50% of the shares in the company prior to 20 September 1985 and received more than 50% of the dividends paid by the company. 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 1985 and the asset continues to be a pre-20 September 1985 asset.