Edited version of private advice

Authorisation Number: 1052312355190

Date of advice: 17 October 2024

Ruling

Subject: Pre-capital gains tax asset and GST

Question 1

Has section 149-30 of the Income Tax Assessment Act 1997 (ITAA 1997) been triggered in relation to the Properties owned by the Company?

Answer 1

No.

Question 2

Will section 38-480 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) apply to the Company's supplies of the Properties to treat the supplies as GST free?

Answer 2

Yes.

This ruling applies for the following periods:

Income year ended 30 June 202X

Income year ended 30 June 202Y

The scheme commenced on:

1 July 202X

Relevant facts and circumstances

The Company has two classes of shares on issue.

The Company's governing documents set out the rights attached to the two classes of shares. These have not been amended since 20 September 1985 and no additional classes of shares have been issued.

The constitution of the Company does not prevent it from making distributions to members.

The shareholders of the Company immediately before 20 September 1985, have been provided. These shareholders are all natural persons and held the shares in their own capacity at that time.

The changes to the shareholders of the Company since 20 September 1985 have been provided.

Some of the individuals that held shares prior 20 September 1985 have passed away. Their shares were transferred under the terms of their Will to new individual shareholders.

There have been other transfers of shares since 20 September 1985, that did not occur due to the death of a former owner, under the terms of a will.

The Company owns and has beneficially held farmland (Properties) since before 20 September 1985. The Company has entered into contracts to sell the Properties to the purchasers.

A farming business has been carried on the Properties by the Company continuously for many years. The whole of the Properties have been used for farming.

In 20XX the purchasers of the Properties entered leasing arrangements to lease the Properties until the completion of the purchase of the Properties, and will continue to carry on the farming business on the Properties until settlement, such that farming businesses will have been carried on the Properties for at least the period of 5 years preceding the Company's supply of the Properties.

The Company is selling the Properties to the purchasers who intend that a farming business will be carried on, on the Properties. The purchase contracts for the Properties also contain clauses stating that the purchasers warrant that they intend that a farming business will be carried on after completion of the purchase on the Properties.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section 58-5

A New Tax System (Goods and Services Tax) Act 1999 section 58-10

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 subsection 38-475(2)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-475(2)(b)

A New Tax System (Goods and Services Tax) Act 1999 section 38-480

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-480(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 38-480(b)

Income Tax Assessment Act 1936 former subsection 82KZC(1)

Income Tax Assessment Act 1936 former subsection 160ZZS(1)

Income Tax Assessment Act 1936 former subsection 160ZZS(2)

Income Tax Assessment Act 1936 former subsection 160ZZS(1A)

Income Tax Assessment Act 1936 former subsection 160ZZS(3)

Income Tax Assessment Act 1936 former section 160ZZRS

Income Tax Assessment Act 1936 former section160ZZRT

Income Tax Assessment Act 1936 former section160ZZS

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 section 149-10

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 149-15(4)

Income Tax Assessment Act 1997 subsection 149-15(5)

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

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

Income Tax (Transitional Provisions) Act 1997 section 149-5

Reasons for decision

Summary

Section 149-30 of the ITAA 1997 has not been triggered in relation to the Properties and therefore they have not stopped being a pre-CGT asset.

Detailed reasoning

Section 149-10 of the ITAA 1997 provides that 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; or

(ii)              Subdivision C of Division 20 of former Part IIIA of that Act;

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.

Note: There are transitional rules for assets that stopped being pre-CGT assets under the Income Tax Assessment Act 1936: see section 149-5 of the Income Tax (Transitional Provisions) Act 1997.

Former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA 1936), which applied to pre-CGT assets held by non-public entities between 20 September 1985 and the end of the 1998 income year, provides the following:

For the purposes of the application of this Part in relation to a taxpayer, an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset.

Former subsection 160ZZS(1A) of the ITAA 1936 provided that where former subsection 160ZZS(1) applies to deem an asset to have been acquired after 19 September 1985, the asset will be taken to have been acquired for the purposes of Part IIIA of the ITAA 1936 on the date on which the majority underlying interests in the asset ceases to be held by the taxpayer who held that interest immediately before 20 September 1985. Further, the taxpayer is taken to have acquired the asset for consideration equal to the market value of the asset at that time.

Former subsection 160ZZS(3) of the ITAA 1936 provided that up until 19 January 1997, 'majority underlying interests' and 'underlying interest' when applying subsection 160ZZS(1) have the same meaning as in Subdivision 3G of Part III. These definitions applied until 19 January 1997.

Majority underlying interests in relation to property was defined in former subsection 82KZC(1) of the ITAA 1936 to mean more than one-half of:

(a)           The beneficial interests that natural persons hold (whether directly or through one or more interposed companies, partnerships or trusts) in the property, and

(b)           The beneficial interests held by natural persons (whether directly or through one or more interposed companies, partnerships or trusts) in any income that may be derived from the property.

Underlying interest in relation to property was defined in former subsection 82KZC(1) of the ITAA 1936 to mean a beneficial interest held by a natural person (whether directly or through one or more interposed companies, partnerships or trusts) in the property or in any income that may be derived from the property.

The definitions of majority underlying interest and underlying interest were replaced by former section 160ZZRR of the ITAA 1936 on 20 January 1997 with similar effect.

From 20 January 1997, former section 160ZZRS of the ITAA 1936 provided that a natural person is taken to hold an indirect beneficial interest in an asset of an entity if the other entity were to distribute any of its capital and the capital was then successively distributed by each entity interposed between the other entity and the natural person.

From 20 January 1997, former section 160ZZRT of the ITAA 1936 provided that a natural person is taken to hold an indirect beneficial interest in income derived from an asset of an entity if the other entity were to pay a dividend of otherwise distribute any of its income and the dividend or income was then successively distributed by each entity interposed between the other entity and the natural person.

Former subsection 160ZZS(2) of the ITAA 1936 which applied until 19 January 1997 provides:

For the purposes of this section, where, by reason of the death of a person, a natural person acquires a percentage (in this subsection referred to as the 'acquired percentage') of the underlying interests in an asset, the natural person shall be deemed to have held (in addition to any other part of the total underlying interest that the person held or is deemed to have held), at any time when the deceased person held a percentage (in this subsection referred to as the 'deceased person's percentage') of the total underlying interests in the property, a percentage of the total underlying interests in the property equal to the acquired percentage, or the deceased person's percentage at that time, whichever is the less.

Former subsection 160ZZS(2) of the ITAA 1936 was replaced by former section 160ZZRU on 20 January 1997, with similar effect.

From 1 July 1998

From the 1 July 1998, Division 149 of the ITAA 1997 replaced former section 160ZZS of the ITAA 1936 and related provisions.

Subsection 149-30(1) of the ITAA 1997 states that a CGT asset stops being a pre-CGT asset at the earliest time when the 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 where the Commissioner is satisfied, or thinks it reasonable to assume, that at all times after 20 September 1985 and before a particular time, majority underlying interests in the asset were held by ultimate owners who had majority underlying interests immediately before that date, then subsection 149-30(1) applies as if that were in fact the case.

Majority underlying interests in a CGT asset is defined in subsection 149-15(1) of the ITAA 1997 to mean more than 50% of the beneficial interests that ultimate owners have, whether directly or indirectly, in the asset and in any ordinary income that may be derived from the asset.

An underlying interest in a CGT asset is defined in subsection 149-15(2) of the ITAA 1997 as 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.

An ultimate owner is defined in subsection 149-15(3) of the ITAA 1997 to include an individual or a company whose constitution prevents it from making any distribution, whether in money, property or otherwise, to its members.

Subsection 149-15(4) of the ITAA 1997 provides that an ultimate owner indirectly has a beneficial interest in a CGT asset of another entity if they would receive for their own benefit, any of the capital if the other entity were to distribute any of its capital and the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner.

Similarly, subsection 149-15(5) of the ITAA 1997 provides that an ultimate owner indirectly has a beneficial interest in ordinary income that may be derived from a CGT asset of another entity if they would receive for their own benefit any of the income if the other entity were to distribute that income and the income were then successively distributed by each entity interposed between the other entity and the ultimate owner.

Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner by way of a marriage breakdown rollover or because of the death of a person (former owner), the new owner is treated as having held the underlying interests of the former owner for the period the former owner held them.

Where a CGT asset is disposed of in the 1999 and future income years, section 149-5 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA) provides that where former section 160ZZS of the ITAA 1936 applies to deem the acquisition date of a CGT asset to be a date on or after 20 September 1985, the CGT asset is also taken to have been acquired on this date when applying Part 3-1 and 3-3 of the ITAA 1997.

Section 149-5 of the ITTPA also provides that in this situation the first element of the cost base and reduced cost of the CGT asset for the purposes of applying Parts 3-1 and 3-3 of the ITAA 1997 will be the amount the entity is taken to have acquired the asset for under former section 160ZZS of the ITAA 1936.

Application to these circumstances

In this situation, the relevant CGT assets are the Properties the Company has owned since before 20 September 1985.

As the Company is not a natural person, it must be looked through to determine if up until the 30 June 1998, the Commissioner is satisfied or considers it is reasonable to assume that natural persons held more than one-half of the beneficial interests in the Properties and any income derived from the Properties (the underlying interests), since before 20 September 1985 in accordance with former subsection 160ZZS(1) of the ITAA 1936.

Similarly, from the 1 July 1998, as the Company is not an ultimate owner of the Properties as defined by subsection 149-15(3) of the ITAA 1997, the Company must be looked through to determine if more than 50% of the beneficial interests in the Properties and any income derived from the Properties (the underlying interests) were had by the same ultimate owners who had such beneficial interests immediately before 20 September 1985.

As the shareholders of the Company are all individuals and therefore are natural persons and are ultimate owners as defined, the beneficial interest the shareholders had in the Properties and any income derived from the Properties must be considered via their shareholdings in the Company.

Immediately before 20 September 1985, the Company had a number of shares on issue. Numerous shares have been transferred to either existing or new shareholders of the Company since 20 September 1985, including transfers due to the deaths of former owners of those shares.

Shares transferred due to the death of a former owner

Where a new owner has acquired an underlying interest in the Properties due to the death of a former owner, the new owner is deemed to have held the underlying interest in the Properties for the period the former owner held them in accordance with subsections 149-30(3) and 149-30(4) of the ITAA 1997.

In accordance with ATO Interpretative Decision ATO ID 2003/779 Income Tax CGT: majority underlying ownership and deceased estate - continuity of interest during the period of administration, the beneficiary of a deceased estate is treated as having beneficial interests in the assets of the estate before the estate is fully administered.

A portion of the Company shares, amounting to majority underlying interests for the purposes of Division 149, were transferred to new owners after 20 September 1985 due to the deaths of pre-CGT shareholders. As these former owners held an indirect underlying interest in the Properties since before 20 September 1985 via their shareholdings in the Company, the new owners are similarly deemed to have held those interests since that time. As per ATO ID 2003/779, this is the case even though the shares in the Company were transferred after their deaths.

Consequently, there was no change in the majority underlying ownership of the Properties when shares in the Company were transferred to new owners upon the death of former owners.

Remaining share transfers

Other shares in the Company were transferred to shareholders that did not hold any shares in the Company before 20 September 1985. These share transfers will result in a change of the underlying interests of the Properties. However, these transfers were of an insufficient number of shares to amount to majority underlying interests.

Based on the facts presented, the Commissioner is satisfied that more than 50% of the underlying interests in the Properties have been held by ultimate owners who held those interests immediately before 20 September 1985.

Consequently, the Properties will not stop being pre-CGT assets under section 149-30 of the ITAA 1997 and former section 160ZZS(1) of the ITAA 1936.

Question 2

Summary

Section 38-480 of the GST Act will apply to the Company's supplies of the Properties to treat the supplies as GST free.

Detailed reasoning

Section 9-5 of the GST Act provides that you make a taxable supply if:

(a)          you make the supply for consideration

(b)          the supply is made in the course or furtherance of an enterprise that you carry on

(c)          the supply is connected with Australia, and

(d)          you are registered, or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In this case, the Company will supply land that is in Australia for consideration; in the course of its leasing enterprise, and it is registered for GST. Therefore, the Company's supplies of land satisfy the requirements of paragraphs 9-5(a), (b), (c) and (d).

Section 38-480 of the GST Act states the supply of a freehold interest in land is GST-free if:

(a)          the land is land on which a farming business has been carried on for at least the period of 5 years preceding the supply, and

(b)          the recipient of the supply intends that a farming business be carried on, on the land.

The phrase 'farming business' has the meaning given by subsection 38-475(2) of the GST Act which, provides that an entity carries on a farming business if it carries on a business of:

(a)          cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment

(b)          maintaining animals for the purpose of selling them or their bodily produce (including natural increase)

(c)          manufacturing dairy produce from raw material that the entity produced, or

(d)          planting or tending trees in a plantation or forest that are intended to be felled.

Paragraph 38-475(2)(b) of the GST Act is most relevant in this case. Livestock farming and grazing is maintaining animals for the purpose of selling them or their bodily produce and is a farming activity.

A farming business of livestock farming and grazing has been carried on the Properties by the Company for many years. In 20XX the purchasers of the Properties entered leasing arrangements to lease the Properties until the completion of the purchase of the Properties, and will continue to carry on the farming business on the Properties, such that farming businesses will have been carried on the Properties for at least the period of 5 years preceding the Company's supply of the Properties.

As such, the requirement of paragraph 38-480(a) of the GST Act is satisfied as a farming business has been carried on for more than five years immediately preceding the supply of the land.

the Company is selling the Properties to the purchasers who intend that a farming business will be carried on, on the Property as the purchase contracts for the Properties contain clauses stating that the purchasers warrant that they intend that a farming business will be carried on after completion on the Properties. Therefore, the requirement of paragraph 38-480(b) of the GST Act is satisfied.

As the requirements of section 38-480 of the GST Act are satisfied, section 38-480 will apply to the Company's supplies of the Properties and treat the supplies as GST free.