ATO ID 2006/172: Capital Gains Tax: pre-CGT asset and majority underlying interest - whether a non-profit company can be an ultimate owner if its constitution permits distributions to members in limited circumstances
Date of decision: 30 June 2006
Year of income: Year ended 30 June 2005
Business line: Private Groups and High Wealth Individuals

Issue
Can a non-profit company be an ultimate owner under paragraph 149-15(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) at a particular time if its constitution provides for distributions, in limited circumstances, to an entity with similar objects which is a member of the non-profit company?

Decision
No. Under the terms of the non-profit company's constitution, the entity receives the distributions in its capacity as a member of the non-profit company.

Facts
At all relevant times an entity (Entity) is a member of a non-profit company (Company) which owns assets that it acquired before 20 September 1985. Under Company's constitution no income or property of Company shall be paid or distributed to members except as expressly provided. One clause in the constitution of Company (first clause) states that should Company have property remaining after a winding up and payment of all debts and liabilities, that property shall be distributed to Entity provided Entity has similar objects to Company. However a second clause in Company's constitution (second clause) provides that this first clause does not apply if Entity ceases to be a member of Company. A third clause in the constitution of Company (third clause) states that any property remaining after a winding up of Company and payment of its debts and liabilities will be paid to members if Entity ceases to be a member of Company for any reason.

Reasons for decision
Summary: Under subsection 149-30(1) of the ITAA 1997 a CGT asset of an entity stops being a pre-CGT asset at the earliest time when the 'majority underlying interests' in the asset were not held by ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985. Paragraph 149-15(3)(b) of the ITAA 1997 states that a company whose constitution prevents it from making any distribution, whether in money, property or otherwise, to its members, is an 'ultimate owner' for the purposes of Division 149 of the ITAA 1997. The terms of Company's constitution, when taken as a whole, provide that Entity can receive distributions of property from Company in its capacity as a member of Company after a winding up. While Entity will only receive distributions if it has similar objects to Company, this entitlement is conditional upon Entity continuing to be a member of Company. Further, the third clause in the constitution of Company permits distributions to members other than Entity in limited circumstances. Accordingly Company is not an 'ultimate owner' within paragraph 149-15(3)(b) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 Division 149 paragraph 149-15(3)(b) subsection 149-30(1)
Related ATO interpretative decisions: ATO ID 2005/294 | ATO ID 2005/293
Subject references: Friendly societies Majority underlying interests Pre-CGT assets Ultimate owners