Issue
Where 50% of the shares in a loss company received by a beneficiary of a deceased estate are disposed of to another beneficiary of the same deceased estate, will this cause the company to fail the ownership conditions in Division 165 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. Beneficial ownership of 50 per cent of the shares will no longer rest with someone who received them as a beneficiary of the estate and the requirement of paragraph 165-205(b) of the ITAA 1997 ceases to be satisfied from the time of the disposal to a fellow beneficiary of the estate.
Facts
All of the shares in Loss Company were beneficially owned by individual D at the time of his death. Individuals B1 and B2 were equal beneficiaries of the estate and each received half of the shares in Loss Company from the estate. Subsequently, B1 negotiated a disposal of their 50% shareholding in Loss Company to B2. Loss Company is now in a position to recoup prior year losses.
Reasons for Decision
For the purposes of the ownership conditions in Division 165 of the ITAA 1997, as long as the shares in Loss Company continue to be owned beneficially by someone who received them, in their capacity as a beneficiary of the estate, those shares will be taken to continue to be owned beneficially by the deceased pursuant to paragraph 165-205(b) of the ITAA 1997.
Upon disposal of the shares of beneficiary B1 to fellow beneficiary B2, the necessary connection of continuing beneficial ownership of the shares in Loss Company with someone who received them as a beneficiary of the estate, ceased to exist. The additional shares in Loss Company acquired by beneficiary B2 from B1 cannot be taken to have been received by B2 in their capacity as a beneficiary of the estate.
The requirement of paragraph 165-205(b) of the ITAA 1997 is not met in respect of 50% of the shares in Loss Company and therefore, the ownership conditions in Division 165 of the ITAA 1997 are not satisfied.