1 Pursuant to subsection 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997), is the Commissioner satisfied that at all times on or after 20 September 1985 to the date of this ruling application, a majority of the underlying interests in the Property, were held by ultimate owners who had majority underlying interests immediately before 20 September 1985?
1 No. Question 2 Can you apply the small business 15-year exemption to disregard your share of the capital gain made on the disposal of the Property? Answer 2 Yes. This ruling applies for the following periods : Year ending 30 June 20XX Year ending 30 June 20XX The scheme commenced on: 1 July 20XX
The Company was incorporated prior to 20 September 1985. Prior to 20 September 1985, the shareholders of the Company were: • Person A - 1 ordinary share • Person B - 1 ordinary share • Person C - 1 ordinary share • Person D - 1 ordinary share • Person E - 1 ordinary share Following share transfers, the current shareholding of the Company is as follows: • Person E - 1 ordinary share • Person F - 1 ordinary share The Company does not carry on a business. The Company purchased the Property prior to 20 September 1985. The Company does not hold any assets aside from the Property. The Property is farmland and is used in carrying on a business by a partnership (the Partnership). Person E and Person F have an equal entitlement in the Partnership and each receive 50% of the income and capital distributions. The Partnership has used the Property in the course of carrying on a farming business for over X years. The annual turnover of the Company, its affiliates and connected entities is below $2m.
Person E and Person F wish to retire and substantially wind back their involvement in the farming business. Person E and Person F currently work in excess of X hours per week on farming activities. The intention is to reduce the scale of their working hours to approximately X hours or less per week through a reduction in their operations. The intention is to distribute the Property in-specie to the current shareholders of the Company, Person E and Person F. The maximum net assets value of the group is above $XX. Person E and Person F are both over 55 years of age.
Income Tax Assessment Act 1997 section 108-5 Income Tax Assessment Act 1997 section 149-10 Income Tax Assessment Act 1997 section 149-15 Income Tax Assessment Act 1997 subsection 149-30(1) Income Tax Assessment Act 1997 subsection 149-30(2) Income Tax Assessment Act 1997 section 152-55 Income Tax Assessment Act 1997 section 152-60 Income Tax Assessment Act 1997 section 152-65 Income Tax Assessment Act 1997 section 152-110
Division 149 of the ITAA 1997 provides that pre-CGT assets will be deemed to be post-CGT assets where there has been a change in the majority underlying ownership of the assets. A CGT asset that an entity owns is a pre-CGT asset if, and only if: (a) the entity last acquired the asset before 20 September 1985, and (b) the entity was not, immediately before the start of the 1998-99 income year, taken under: (i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA 1936), or (ii) Subdivision C of Division 20 of former Part IIIA of the ITAA 1936 to have acquired the asset on or after 20 September 1985, and (c) the asset has not stopped being a pre-CGT asset of the entity because of this Division (section 149-10 of the ITAA 1997). An 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 (subsection 149-30(1) of the ITAA 1997).
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, subsections 149-30(1) and 149-30(1A) of the ITAA 1997 apply as if that were in fact the case (subsection 149-30(2) of the ITAA 1997). 'Majority underlying interests' in a CGT asset are defined in subsection 149-15(1) of the ITAA 1997 as: (a) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset, and (b) 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. From the definition it is clear that ultimate owners must have greater than 50% of the beneficial interests in both the asset and any ordinary income that may be derived from the asset.
An underlying interest in a CGT asset is a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset(subsection 149-15(2) of the ITAA 1997). 'Ultimate owner' is defined in subsection 149-15(3) of the ITAA 1997, and relevantly for the purposes of this case, the definition includes: (a) an individual, or (b) a company whose constitution prevents it from making any distribution, whether in money, property or otherwise, to its members. An ultimate owner indirectly has a beneficial interest in a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if: (a) the other entity were to distribute any of its capital, and (b) the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner (subsection 149-15(4) of the ITAA 1997).
An ultimate owner indirectly has a beneficial interest in ordinary income that may be derived from a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of a dividend or income if: (a) the other entity were to pay that dividend, or otherwise distribute that income, and (b) the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner (subsection 149-15(5) of the ITAA 1997). The definition of 'CGT asset' in section 108-5 of the ITAA 1997 includes land and buildings (Note 1 to subsection 108-5(2) of the ITAA 1997). Taxation Ruling IT 2530 states that a change in the proportions in which natural persons hold an interest in an asset will not affect the pre-CGT status of an asset. This is demonstrated at paragraph 10:
If natural persons who immediately before 20 September 1985 held more than one half of the underlying interests in an asset continue to hold more than one half of the underlying interests at all times on and after that date, there will be no change in the majority underlying interests in the asset for the purposes of section 160ZZS. In these circumstances a change in the proportions in which the natural persons held interests in the asset would not have a bearing on the application of section 160ZZS. The following example illustrates this point: • Immediately before 20 September 1985 underlying interests in an asset of a company were owned by four natural persons in the following proportions A - 90% B - 5% C - 3% D - 2%. • Following a change in the shareholding of the company after 20 September 1985, the underlying interests in the asset were owned by natural persons in the following proportions A - 1% B - 2% C - 48% D - 0% E - 49%.
• The natural persons who owned underlying interests both immediately before 20 September 1985 and after the change in ownership were A, B and C. Immediately before 20 September 1985 A, B and C between them owned more than one half of the underlying interests. After the change A, B and C between them still owned more than one half of the underlying interests. Accordingly, more than one half of the underlying interests in the company's asset continued to be held by the same persons. Section 160ZZS would therefore not apply to deem the asset acquired by the company before 20 September 1985 to have been acquired on or after that date. Application to your circumstances Immediately before 20 September 1985 the ultimate owners who had underlying interests in the Property were the following individuals: Name Underlying Interest (%) Person A 20 Person B 20 Person C 20 Person D 20 Person E 20 The ultimate owners who had underlying interests in the Property after the transfers were the following individuals: Name Underlying Interest (%) Person E 60 Person F 40
Taxation Ruling IT 2530 states that a change in the proportions in which natural persons hold an interest in an asset will not affect the pre-CGT status of an asset. However, in this case, Person E is the only individual who currently holds an underlying interest who held an interest immediately before 20 September 1985. The remaining individuals who had an underlying interest immediately before 20 September 1985 no longer hold an interest in the company with some of those interests being acquired by Person F. Therefore, the proposed changes represent more than a mere change in the proportions of the interests between the shareholders. Person E is the only natural person who owned underlying interests both immediately before 20 September 1985 and after the change in ownership. As they didn't hold a majority of the underlying interests immediately before 20 September 1985, the underlying interests in the Property were not had by ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. Therefore Division 149 of the ITAA 1997 will deem the Property to be a post-CGT asset. Question 2 Small business 15-year exemption
Section 152-105 of the ITAA 1997 provides a small business 15-year exemption for individuals. Under this section, you can disregard the capital gain made on the disposal of a CGT asset if you: (a) the basic conditions of Subdivision 152-A are satisfied; (b) the company continuously owned the CGT asset for the 15-year period ending just before the CGT event; (c) the company had a significant individual for a total of at least 15 years during which the company owned the CGT asset; (d) the significant individual of the company just before the CGT event either: (i) was 55 or over at the time of the CGT event and the event happens in connection with the significant individual's retirement; or (ii) the significant individual is permanently incapacitated at the time of the CGT event. Pursuant to section 152-55 of the ITAA 1997, an individual is a significant individual in a company at a time if, at that time, the individual has a small business participation percentage in the company of at least 20%. In your case, the basic conditions contained in Subdivision 152-A of the ITAA 1997 are satisfied because:
• a CGT event occurred when you disposed of the property • the event resulted in a gain • an entity connected with you (the Partnership) was a small business entity at the time of the event • you owned the property for more than X years and the property was used in the business of the Partnership for a total of at least X years of your ownership period, and • during the CGT event year: o you have not and will not carry on any business, and o the Partnership used the Property in its business. In addition, • you continuously owned the property for the X year period ending just before the CGT event • you have had a significant individual for at least X years during the ownership period • a significant individual just before the CGT event o is at least 55 years old, and o the disposal happened in connection with their retirement.
Therefore, you qualify for the small business X year exemption in section 152-110 of the ITAA 1997 in relation to the Property. You can disregard the capital gain made on its disposal.