Issue
Does subsection 149-30(1) of the Income Tax Assessment Act ('ITAA 1997') apply when an association, incorporated under the ACT Associations Incorporation Act 1991 , changes registration to a company under the Corporations Act 2001 (Corporations Act)?
Decision
No. To the extent that the incorporated association has an asset that the CGT law treats as having been acquired before 20 September 1985, subsection 149-30(1) of the ITAA 1997 will not apply on registration as a company under the Corporations Act.
Facts
The taxpayer is an association incorporated under the ACT Associations Incorporation Act 1991.
The association is to convert to a company under the Corporations Act.
The association is not an exempt entity for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997.
Reasons for Decision
Paragraph 601BM(1)(a) of Part 5B.1 of the Corporations Act provides that registration under this Part does not create a new legal entity. As such there is no change of ownership of assets on registration under Corporations Act and no CGT event will happen under Division 104 of ITAA 1997. Therefore, the pre-CGT asset status of assets will be retained on conversion to a company under Corporations Act provided the assets have not stopped being pre-CGT assets before the time of the conversion.
Subdivision 149-B of ITAA 1997 provides that an asset of a non-public entity stops being a pre-CGT asset at the 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 ITAA 1997).
The majority underlying interest requirements are met where a company (the association is a company for the purposes of the ITAA 1936 and ITAA 1997) is an 'ultimate owner' because its constitution prevents it from making any distribution, whether in money, property or otherwise, to its members (paragraph 149-15(3)(b) of the ITAA 1997).
Section 160ZZS of ITAA 1936 (section 160ZZS of the ITAA 1936 was rewritten as Subdivision 149-B of the ITAA 1997) applies to pre-CGT assets before the start of the 1998-99 income year and for the purposes of this interpretative decision provides the same outcome.
Therefore, provided the association's constitution prevents it from making any distribution to its members on or after 20 September 1985 the pre-CGT assets of the association will retain their pre-CGT asset status on conversion to a company under Corporations Act.
After conversion, to preserve the pre-CGT status of assets, the company will need to continue to meet the requirements of Subdivision 149-B of ITAA 1997.