Edited version of private advice

Authorisation Number: 5010062000175

Date of advice: 22 January 2020

Ruling

Subject: Capital Gains Tax and majority underlying ownership interest

Question

Is the Commissioner satisfied, that for the purposes of section 149-30 of the Income Tax Assessment Act (ITAA)1997 at all times on and after 20 September 1985 until present the majority underlying ownership interests in the assets held by Company A as trustee for the Trust have been held by persons who, immediately prior to 20 September 1985, held the majority underlying interests in those assets?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2020

The scheme commences on:

1 July 2019

Relevant facts and circumstances

The Trust was established by deed on prior to 20 September 1985 (pre CGT). The original trustees of the Trust were A, B and C.

A deed of appointment was entered into after 20 September 1985 (post CGT), under which A, B and C resigned as trustees, and Company A was appointed as the replacement trustee, of the Trust.

No other changes have been made to the terms of the Trust.

Taxpayer D and Taxpayer E were appointed as directors of Company A at this time (post CGT). Taxpayer D has held X of the X ordinary shares in Company A since that date. The remaining X ordinary share has been held by Company B since that date.

The ordinary shares in Company B have been held by the Trust since prior to the introduction of capital gains tax and it is these shares which this ruling relates too and whether they have retained their pre CGT status.

Company A in its capacity as trustee of the Trust holds XX ordinary shares in Company B. These are the only ordinary shares on issue in Company B. These shares have been held by the trustee on trust for the Trust since prior to 20 September 1985.

The only assets of Company A in its capacity as trustee of the Trust are the XX ordinary shares in Company B

There have been no amendments to the actual provisions of the trust since the trust was established pre CGT.

Taxpayer D has always been and remains the beneficiary of the Trust. The trustee does not have the power to alter this. The trustee cannot make a distribution of capital from the Trust until the trust vests.

The Trust has never been a public entity.

If Taxpayer D is alive on the vesting day of the Trust, he will also be the sole capital beneficiary. If Taxpayer D dies prior to the vesting day of the Trust, Company A is to pay and transfer fund as provided for in clause 1(d) of the trust deed.

Under the terms of the trust deed, on the death of Taxpayer D, the trustee shall hold the trust fund upon trust for the child or children or the grandchild or grandchildren then living or the widow or wife if then living of the father of Taxpayer D, or the child or children then living of the widow if then living of Taxpayer D, or such one or more of them to the exclusion of the other or others of them in such shares and proportions and upon such trusts as the trustee may in its absolute discretion shall think fit. If, on the death of Taxpayer D, there is no person who would satisfy the definition of beneficiary, the meaning of beneficiary would be expanded to include the next of kin of Taxpayer D's father.

The vesting day of the Trust is the day on which shall expire the period of 21 years after the death of the last survivor of the descendants now living or such earlier date as the trustee may appoint.

Company A has not yet appointed a vesting date for the Trust.

There have been no distributions of income from the Trust since it was established to date, on account that the trust has had no income to date.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 149

Income Tax Assessment Act 1997 Section 149-30

Income Tax Assessment Act 1997 Section 149-15

Reasons for decision

Summary

The shares (that is, the XX ordinary shares in Company B) held by the Trust satisfy the conditions in subsection 149-10 of the ITAA 1997 and therefore, retained their status as pre-CGT assets.

Detailed reasoning

Division 149 of the ITAA 1997 outlines the rules which govern when an asset acquired by a taxpayer before 20 September 1985 is treated as being acquired after that date for capital gains tax (CGT) purposes.

Under subsection 149-30(1) of the ITAA 1997, a pre-CGT asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interest in the asset were not had by the ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985.

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

• more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and
• 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(4) of the ITAA 1997 provides that if an ultimate owner (new owner) has acquired an interest in an asset which is transferred to them as a result of the death of a person (the former owner), the new owner is treated as having held the underlying interest of the former owner over the years. Essentially the new owner will stand in the shoes of the former owners.

A beneficiary in a discretionary trust, such as the trust, could not be said to have a beneficial interest in the income or assets of the trust, in the light of cases such as Gartside v IRC [1968] AC 553 and Re Weir's Settlement MacPherson & anor v. IRC [1970] 1 All ER 297.

However, paragraphs 5 to 7 of Taxation Ruling IT 2340 discuss what happens in respect of non-fixed family trusts and the application of the former section 160ZZS of the Income Tax Assessment Act 1936 (now Division 149 of the ITAA 1997):

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. That is consistent with the role of the section to close potential avenues for avoidance of tax in cases where there is a substantial change in underlying ownership of assets and the legislative guidance contained in Subdivision G of Division 3 of Part III of the Act. 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.'

The discretionary powers of the trustee of a discretionary (family) trust and those of the trustee of a discretionary testamentary trust are not materially different and it is reasonable to adopt the same approach to both when considering the question of majority underlying interests for purposes of Division 149 of the ITAA.

Application to your circumstances

The Trust is not a public entity, Subdivision 149-B will apply.

Paragraph 5 to 7 of IT 2340 are relevant for the purpose of determining if there has been a change in the majority underlying ownership of the assets of the Trust. No amendments have been made to the trust and Taxpayer D has been the beneficiary entitled to receive a distribution of income from the Trust.

In accordance with subsection 149-30(2) of the ITAA 1997, the majority underlying interests in the Trust have been held at all times by the same ultimate owners who held such interests immediately before 20 September 1985.

The Commissioner finds it reasonable that no change in the majority underlying interests in the CGT assets has occurred, therefore, the XX ordinary shares in Company B held by the trustee for the Trust remain pre CGT shares.