1 Is the Commissioner satisfied, or think it reasonable to assume, that for the purposes of Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) the majority underlying interests in the Property have been maintained?
1 Yes. Question 2 Is the Property a pre-CGT asset on the basis that it meets the requirements under section 149-10 of the ITAA 1997? Answer 2 Yes. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 1 July 20XX
The Company was incorporated prior to 20 September 1985. The Company's constitution does not prevent it from making distributions to its members. Since incorporation, the Company's shares have been owned by members of Family A in their personal capacity and also by the Family A Family Trust. The Company's shares include ordinary, Class A, Class B, Class C and Class D shares. Each class of shares carries equal rights to capital on winding up and discretionary rights to the income. However, notwithstanding that the different classes have discretionary rights to income all dividends have been paid to shareholders in proportion to the total number of shares held - irrespective of the class of shares. Since incorporation, all dividends were paid to members of Family A. The dividends paid on shares held by the Family A Family Trust were ultimately distributed to members of Family A. The Company purchased the Property prior to 20 September 1985. After 20 September 1985, Person A's shares were transferred to Person B pursuant to Person A's will. A contract for the sale of the Property has been signed. Family A Family Trust
The Family A Family Trust was established prior to 20 September 1985. The Schedule of the original trust deed identified the primary beneficiaries as the children of Person A. The general beneficiaries are defined to include: (a) the Primary Beneficiaries; (b) the brothers, sisters, spouses, widows, widowers, children and grandchildren of the Primary Beneficiaries; (c) the spouses, widows, widowers, children and grandchildren of the brothers, sisters, spouses, children and grandchildren of the Primary Beneficiaries; No entities have been added as a general beneficiary of the trust deed.
Income Tax Assessment Act 1997 section 104-10 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 section 149-30
Question 1 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). Subsections 149-30(3) and (4) provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner upon the death of a person (former owner), the new owner is treated as having held the underlying interest of the former owner for the period the former owner held them. '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). In Taxation Ruling IT 2340 Income tax: capital gains: deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date
the Commissioner adopts a pragmatic approach of looking through interposed entities to determine whether natural persons hold the beneficial interests for the purposes of former section 160ZZS of the ITAA 1936, which preceded Division 149 of the ITAA 1997. Paragraph 2 of IT 2340 states: ... underlying interests in relation to the assets concerned mean beneficial interests held by natural persons whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets. ATO Interpretative Decision 2003/778 Income Tax: CGT: majority underlying ownership and deceased estate - discretionary trust - beneficiary a 'new owner' explains that:
Taxation Ruling IT 2340 correctly reflects the position that section 160ZZS of the ITAA 1936, by its terms, necessarily supplants normal legal concepts of interests in assets. For the purposes of section 160ZZS, a beneficiary of a discretionary trust is treated as having a beneficial interest in the trust's assets. Likewise, a shareholder is treated for the purposes of section 160ZZS of the ITAA 1936 as having a beneficial interest in the company's assets. 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 (i.e., 98%). After the change A, B and C between them still owned more than one half of the underlying interests (i.e., 51%). 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 The Company owned the Property immediately prior to 20 September 1985. The Company's constitution does not prevent it from making distributions to its members, such that it is not an 'ultimate owner' who can have an underlying interest in the asset. Establishing underlying interests requires the adoption of a 'look through' approach to trace the beneficial interest in an asset to an ultimate owner which is usually a natural person.
As individual shareholders, Person A and Person B were ultimate owners who had an indirect beneficial interest in the assets of the Company, and in the ordinary income that may be derived from the assets of the Company. The Family A Family Trust is a discretionary trust. As mentioned, the beneficiaries of a discretionary trust that are natural persons are treated, for the purposes of former subsection 160ZZS(1) of the ITAA 1936 and Division 149 of the ITAA 1997, as having a beneficial interest in the trust's assets (in this case, the shares in the Company). The Family A Family Trust was established for the benefit of the children of Person A and the members of their families. The natural persons and ultimate owners who indirectly held beneficial interests in the assets of the Company, and in the ordinary income that may be derived from the assets of the Company, were members of Person A's family. On this basis, immediately before 20 September 1985, the majority underlying interests in the asset were held by Person A and Person B, and, by looking through the chain of entities, other members of Person A's family as beneficiaries of the Family A Family Trust.
1st change in shareholding A portion of the shares in the Company were transferred to Person B after 20 September 1985 due to the death of Person A. As Person A held an indirect underlying interest in the property since before 20 September 1985 via their shareholding in the Company, Person B is similarly deemed to have held that interest since that time. Consequently, the majority underlying ownership in the Property has been maintained following this change in shareholding. 2nd change in shareholding
When Person B transferred her shares to Person C and Person D, no new ultimate owners were introduced. The share dealing simply changed the respective percentages as between the ultimate owners with majority underlying interests immediately before 20 September 1985. The transfer of existing shares to other ultimate owners who indirectly held interests in the land before 20 September 1985 in their capacity as beneficiaries of the family trust that held shares in the Company before that date, does not reduce the aggregated underlying interests of the ultimate owners below 100%. Consequently, the majority underlying ownership in the Property has been maintained following this change in shareholding. Conclusion The Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 majority underlying interests in the Property were had by ultimate owners who had majority underlying interests in those assets before that date. Question 2 You make a capital gain or a capital loss if a CGT event happens to a CGT asset.
Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset. However, any capital gain or capital loss you make on disposal of a CGT asset acquired prior to 20 September 1985 is disregarded pursuant to paragraph 104-10(5)(a)of the ITAA 1997. In this case, the Company purchased the Property prior to 20 September 1985, and it has made no major improvements to the Property since it was purchased. Additionally, no other income tax provision will operate to treat the Property as having stopped being a pre-CGT asset. Therefore, the Property is a pre-CGT asset, and any capital gain or capital loss made on the sale of the Property will be disregarded in accordance with paragraph 104-10(5)(a) of the ITAA 1997.