Edited version of private advice

Authorisation Number: 1052373597478

Date of advice: 28 March 2025

Ruling

Subject: Proposed arrangement

Question 1

If the Proposed Arrangement was implemented in respect of the Land, and if the Land is sold, would any capital gain or capital loss be disregarded under paragraph 104-10(5)(a) of the Income Tax Assessment Act 1997 (ITAA 1997), provided the Land does not stop being a pre-CGT asset under Division 149 of the ITAA 1997?

Answer 1

Yes

Question 2

If the Proposed Arrangement was implemented in respect of the Land, would the Land stop being a pre-CGT asset for the purpose of Division 149 of the ITAA 1997?

Answer 2

No

Question 3

If the Proposed Arrangement was implemented in respect of the Land, would the buildings and structures constructed on the Land be taken to be separate CGT assets under subsection 108-55(2) of the ITAA 1997 if there is a disposal of the Land?

Answer 3

Yes

Question 4

If the Proposed Arrangement was implemented in respect of the Land, would other capital improvements made to the Land be taken to be a separate CGT asset or separate assets under either subsection 108-70(2) or (3) of the ITAA 1997 if there was a disposal of the Land?

Answer 4

Yes

This ruling applies for the following periods:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.      rust is a discretionary trust.

2.      eneficiaries of the Trust are members of a family (the Beneficiaries).

3.      rustee has at all times administered the Trust for the benefit of members of the family.

4.      rust will not make any distribution of the income or capital of the Trust to an entity who is not a Beneficiary.

5.      rustee will continue to administer the Trust for the benefit of members of the family.

6.      rust acquired land before 20 September 1985 (the Land).

7.      and is part of a bigger site (the Site)

8.      ite has been developed into an industrial estate.

9.      rust holds other assets including cash, receivables, plant and equipment, and financial assets.

10.     The Intention of the Trust is to hold the remaining Land as an investment for the purpose of deriving income in the form of rent. The Trust is considering a change to the leasing and development of the Land (Proposed Arrangement).

Relevant legislative provisions

Section 104-10 of the Income Tax Assessment Act 1997

Section 108-55 of the Income Tax Assessment Act 1997

Section 108-70 of the Income Tax Assessment Act 1997

Division 149 of the Income Tax Assessment Act 1997

Section 149-10 of the Income Tax Assessment Act 1997

Section 149-15 of the Income Tax Assessment Act 1997

Section 149-30 of the Income Tax Assessment Act 1997

Reasons for decision

Issue 1

Questions 1 and 2

Detailed reasoning

Subsection 104-10(1) of the ITAA 1997 states that 'CGT event A1 happens if you dispose of a CGT asset'. However, paragraph 104-10(5)(a) of the ITAA 1997 states that 'a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985'.

The Land was acquired by the Trust before 20 September 1985. As such, any capital gain or loss from a disposal (sale) of the Land will be disregarded provided that Division 149 of the ITAA 1997 does not apply to the Land.

Section 149-10 of the ITAA 1997 states:

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

(a)     ntity last acquired the asset before 20 September 1985; and

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

(i)      r 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)     sset has not stopped being a pre-CGT asset of the entity because of this Division.

Subsection 149-30(1) of the ITAA 1997 states that 'the 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'.

If an asset stops being a pre-CGT asset under subsection 149-30(1) of the ITAA 1997, subsection 149-30(1A) of the ITAA 1997 will apply and the CGT provisions in Part 3-1 and Part 3-3 of the ITAA 1997 will apply to the asset as if the asset was acquired by the entity at the time it ceased to be a Pre-CGT asset.

Subsection 149-30(2) of the ITAA 1997 states 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, subsection (1) and (1A) apply as if that were in fact the case'.

The meaning of 'majority underlying interest' is provided in subsection 149-15(1) of the ITAA 1997 which states that 'majority underlying interests in a CGT asset consist of:

(a)     than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and

(b)     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'.

Relevantly, paragraph 149-15(3)(a) of the ITAA 1997 provides that an ultimate owner includes an individual.

Taxation ruling IT 2340 Income tax: capital gains: deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date (IT 2340) sets out the Commissioners view about when section 160ZZS of the Income Tax Assessment Act 1936 (the predecessor to Division 149 of the ITAA 1997) applied to assets held by discretionary trusts:

5. In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised.

6. Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion.

7. In such a case the Commissioner would, in terms of sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed... On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provisions of the Act.

8. On the other hand where, by the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect a change of 50% or more in the underlying interests in the trust assets... the section would have its intended application...

In the current circumstances, the Trust is a discretionary trust set up to benefit the members of a family. The Trustee has at all times administered the Trust to benefit the family and will continue to administer the Trust to benefit the family. The Trustee will not make any distributions of income or capital of the Trust to an entity who is not a Beneficiary of the Trust.

In accordance with the view set out in IT 2340, the Commissioner finds it reasonable to assume that the majority underlying interests in the Land (the relevant trust assets) have not changed and will not change during the ruling period (the trustee will continue to administer the Trust for the benefit of the Beneficiaries, that is, the family members). As the Commissioner finds it reasonable to assume that the underlying interests in the Land have not changed, Division 149 of the ITAA 1997 will not apply, and the Land will continue to be pre-CGT assets (subsection 149-30(2) of the ITAA 1997).

Question 3

Detailed reasoning

Subsection 108-55(2) of the ITAA 1997 states that 'a building or structure that is constructed on land that you acquired before 20 September 1985 is taken to be a separate CGT asset from the land if:

(a)     ntered into a contract for the construction on or after that day; or

(b)     ere is no contract - the construction started on or after that day'.

Any building or structure that may be constructed on the Land under the Proposed Arrangement will start to be constructed after 20 September 1985. No building or structure that may be constructed under the Proposed Arrangement will be constructed under a contract that was entered into before 20 September 1985.

As such, subsection 108-55(2) of the ITAA 1997 will apply to treat any building or structure constructed on the Land under the Proposed Arrangement as a separate CGT asset.

Question 4

Detailed reasoning

Subsection 108-70(2) of the ITAA 1997 states that 'a capital improvement to a CGT asset (the original asset) that you acquired before 20 September 1985 (that is not related to any other capital improvement to the asset) is taken to be a separate CGT asset if its cost base (assuming it were a separate CGT asset) when a CGT event happens (except one that happens because of death) in relation to the original asset is:

(a)     than the improvement threshold for the income year in which the event happened; and

(b)     than 5% of the capital proceeds from the event'.

Subsection 108-70(3) of the ITAA 1997 states that 'capital improvements to a CGT asset (the original asset) that you acquired before 20 September 1985 that are related to each other are taken to be a separate CGT asset if the total of their cost bases (assuming each one were a separate CGT asset) when a CGT event happens in relation to the original asset is:

(a)     than the improvement threshold for the income year in which the event happened; and

(b)     than 5% of the capital proceeds from the event'.

Any capital improvement(s) made to the Land under the Proposed Arrangement will be taken to be a separate CGT asset to the Land provided that the requirements of either subsection 108-70(2) or subsection 108-70(3) of the ITAA 1997 are satisfied in respect of the relevant capital improvement(s).