Edited version of private advice

Authorisation Number: 1052233315421

Date of advice: 28 March 2024

Ruling

Subject: CGT - Division 149 majority underlying interests

Question 1

Is the Commissioner satisfied, or does the Commissioner think it reasonable to assume, that for the purposes of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) the majority underlying interests in the Land have been maintained?

Answer

Yes.

Question 2

Is the Land a pre-CGT asset as set out in section 149-10 of the ITAA 1997?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You were incorporated before 20 September 1985.

Immediately before 20 September 1985 all your shares were held collectively by Individual 1, Individual 2, Individual 3, Individual 4 and Individual 5.

The shares have always been held by these individuals in their personal capacity, that is, no shares are or have been held in the capacity of trustee of a trust.

The shares you have, since incorporation, and at all times since then, included both Class A and Class B shares.

Pursuant to your Articles of Association:

1.    all classes of shares have equal rights to your capital on winding up, and

2.    each class of shares has discretionary rights to your income, that is, your directors may declare dividends in relation to one class of share to the exclusion of the other class.

Your Articles of Association do not prevent you from making distributions to your members.

You have not declared any dividends since your incorporation.

At some time after 20 September 1985 the following shares in you were issued:

1.    XX Class A shares were issued to each of Individual 1 and Individual 2

2.    XX Class A shares were issued to Individual 3, and

3.    XX Class B shares were issued to each of Individuals 4 and 5.

Sometime later Individual 1 transferred their Class A shares in you to Individual 3.

Sometime later again Individual 2 transferred their Class A shares in you to Individual 3.

No further share issues, cancellations or transfers of the shares in you have occurred since that time.

All your shares are now held collectively by Individual 3, Individual 4 and Individual 5, albeit in different proportions to how those shares were held before 20 September 1985.

You own Land acquired before 20 September 1985.

You will transfer or otherwise dispose of the Land before 30 June 20YY.

There will be no change to the majority underlying interests in you between the date of this ruling and the transfer or disposal of the Land.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 section 149-10

Income Tax Assessment Act 1997 section 149-15

Income Tax Assessment Act 1997 section 149-30

Reasons for decision

Summary

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

The Land is a pre-CGT 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 assets where there has been a change in the majority underlying ownership of the assets.

A CGT asset that an entity owns is a pre-CGT asset if, and only if:

(a)  the entity last acquired the asset before 20 September 1985, and

(b)  the entity was not, immediately before the start of the 1998-99 income year, taken under:

(i)            former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA 1936), or

(ii)           Subdivision C of Division 20 of former Part IIIA of the ITAA 1936

to have acquired the asset on or after 20 September 1985, and

(c)  the asset has not stopped being a pre-CGT asset of the entity because of this Division (section 149-10 of the ITAA 1997).

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(1) of the ITAA 1997).

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 (subsection 149-30(2) of the ITAA 1997).

'Majority underlying interests' in a CGT asset are defined in subsection 149-15(1) of the ITAA 1997 as:

(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.

From the definition it is clear that ultimate owners must have greater than 50% of the beneficial interests in both the asset and any ordinary income that may be derived from the asset.

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 (subsection 149-15(2) of the ITAA 1997).

'Ultimate owner' is defined in subsection 149-15(3) of the ITAA 1997, and relevantly for the purposes of this case, the definition includes:

(a)  an individual, or

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

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 (subsection 149-15(4) of the ITAA 1997).

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 (subsection 149-15(5) of the ITAA 1997).

The definition of 'CGT asset' in section 108-5 of the ITAA 1997 includes land and buildings (Note 1 to subsection 108-5(2) of the ITAA 1997).

Application to your circumstances

As you are a company and your Articles of Association do not prevent you from making distributions to your members you are not an ultimate owner. As such you must be 'looked-through' to determine the ultimate owners who held an indirect interest in the Land before 20 September 1985 through their interest in you.

Immediately before 20 September 1985 the ultimate owners who had majority underlying interests in the Land were Individual 1, Individual 2, Individual 3, Individual 4 and Individual 5.

The test in subsection 149-30(1) of the ITAA 1997 is dependent on those 5 individuals collectively continuing to have majority underlying interests in the Land on and after 20 September 1985.

The nature of the analysis required is demonstrated in paragraph 10 of 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. It does not matter how the respective underlying interests change as between the ultimate owners, if those ultimate owners collectively continue to have more than 50% of the beneficial interests in the Land and in any ordinary income that may be derived from the Land then it will continue to be a pre-CGT asset.

In your case, while several share dealings in you have occurred after 19 September 1985, no new shareholders have been introduced. The share dealings simply change the respective percentages as between the 5 ultimate owners with majority underlying interests immediately before 20 September 1985. The transfer of shares between ultimate owners or the issuing of new shares to these ultimate owners does not reduce the aggregated underlying interests of the 5 ultimate owners below 100%.

These 5 ultimate owners collectively comprise those who would receive for their own benefit any dividend or distribution of income or capital if you were to pay that dividend, or otherwise distribute that income or capital.

As such, the Commissioner is satisfied, or thinks it reasonable to assume, that the majority underlying interests in the Land have been maintained. Accordingly, the Land will not stop being a pre-CGT asset of yours because of Division 149 of the ITAA 1997.

For similar reasons to those outlined above, former subsection 160ZZS(1) of the ITAA 1936 will not deem you to have acquired the Land on or after 20 September 1985, and Subdivision C of Division 20 of the former Part III of the ITAA 1936 contains rules for public entities only and is therefore not applicable to you.

As you last acquired the Land before 20 September 1985 the Land is a pre-CGT asset as set out in section 149-10 of the ITAA 1997.