Capital Gains Tax: majority underlying interests - friendly society

Can a friendly society be an ultimate owner under paragraph 149-15(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) at a particular time if, at that time, its constitution only allows distributions to be made to members who hold certain classes of shares but there are no shares issued in the entity?

Yes. The friendly society is an ultimate owner at a time (in this case the end of the test day) because at that time: • there were no members who held shares which carried entitlements to receive distributions from the friendly society, and • the friendly society's constitution did not allow distributions to be made to members in any other circumstances.

A friendly society owns capital gains tax (CGT) assets that it acquired before 20 September 1985.

At the end of a test day prescribed by subsection 149-55(2) of the ITAA 1997, the friendly society's constitution allowed the Board of Directors to declare, at their discretion, the payment of dividends to members holding certain classes of shares.

There were no issued shares in the friendly society at the end of the test day.

The friendly society was prevented by its constitution from making any other distributions to its members at the end of the test day, whether in money, property or otherwise.

Division 149 of the ITAA 1997 determines when a pre-CGT asset will be taken to be acquired after 19 September 1985. For a public entity, this will occur unless the Commissioner is satisfied, or thinks it reasonable to assume, that at the end of a test day, majority underlying interests in the asset were had by ultimate owners who also had majority underlying interests in the asset at the end of the starting day: sections 149-50, 149-60 and 149-70 of the ITAA 1997.

The term 'ultimate owner' is central to the operation of Division 149 of the ITAA 1997.

Ultimate owner is defined in subsection 149-15(3) of the ITAA 1997 and includes companies whose constitutions prevent them from making any form of distribution to their members.

Determining whether a company meets the definition of ultimate owner at a particular time therefore requires a careful examination of its constitution. In particular, it is necessary to consider the entitlements of members to share in any income or capital of the company if a distribution were made at that time.

At the end of the test day, the friendly society's constitution provided the Board of Directors with a discretion to declare dividends from profits to be paid to members holding certain classes of shares.

On a strict reading of paragraph 149-15(3)(b) of the ITAA 1997, the friendly society's constitution does not prevent it from making distributions to its members. The effect of taking this view would be that the friendly society would need to identify ultimate owners who held beneficial interests in its income and capital at the end of the test day. However, there would be no ultimate owners who held such interests because there were no issued shares to which dividend entitlements attached and the friendly society was prevented by its constitution from making any other form of distribution to its members. To read the provisions in this way would therefore deny Division 149 of the ITAA 1997 its intended operation.

As the relevant classes of shares were unissued at the end of the test day, it is considered that the friendly society's constitution did have the effect of preventing it from making any distributions to members at that time. This is because the Board of Directors had no authority to make distributions outside of the circumstances provided by the constitution.

Accordingly, the friendly society can meet the requirements of an ultimate owner in paragraph 149-15(3)(b) of the ITAA 1997 at the end of the test day.