ATO ID 2010/98: Capital gains tax: majority underlying interests - ultimate owners
Date of decision: 25 November 2009
Year of income: Year ended 30 June 2010
Business line: Public Groups and International

Issue
Can a company be an ultimate owner as described in paragraph 149-15(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) at a particular time if its constitution provides that rights to surplus assets on a subsequent winding-up are to be determined under legislation and that legislation does not prevent a distribution to members?

Decision
No. A company is not an ultimate owner as described in paragraph 149-15(3)(b) of the ITAA 1997 at a particular time if at that time its constitution provides that rights to surplus assets on a subsequent winding-up are to be determined under legislation that does not prevent a distribution to members.

Facts
A company owns capital gains (CGT) assets that it acquired before 20 September 1985. Immediately prior to and after 20 September 1985 the company's constitution provided that in the event it was wound-up, the winding-up would be conducted in accordance with legislation which governed the industry. Under that legislation, a distribution of surplus assets on winding-up is to be made in accordance with the instrument of dissolution or the award of the Minister.

Reasons for decision
Summary: 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 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). 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 Macquarie Dictionary , 2005, 4th edition, The Macquarie Library Pty Ltd, NSW, defines 'prevent' as 'to keep from occurring; hinder ... to cut off beforehand or debar (a person, etc), as from something'. In its ordinary meaning, an action is prevented where it is not possible that it will happen. Taking into account the ordinary meaning of the word 'prevent' and the context in which it appears, for the purposes of paragraph 149-15(3)(b) of the ITAA 1997 a constituent document of a company will prevent the making of a distribution to members where it is reasonable to conclude that the effect of that document, taken with the surrounding legal context, is that it is not possible for the company to make distributions to members. In this case, the company's constitution refers the distribution of surplus assets on winding-up to the governing legislation. The legislation governing the distribution of surplus assets by the company on winding-up does not expressly provide that the surplus is to be divided amongst members of the company. This, however is not the test required by paragraph 149-15(3)(b) of the ITAA 1997. The terms of the legislation and the constituent document do not prevent a distribution of surplus assets to members on winding-up, as it is possible for such distributions to be made.

Legislative references: Income Tax Assessment Act 1997 Division 149 paragraph 149-15(3)(b) subsection 149-30(1)
Subject references: Capital gains tax CGT assets Majority underlying interests Pre-CGT assets