ATO ID 2004/978: Capital Gains Tax: status of pre-CGT assets - incorporated association becoming a company
Date of decision: 24 November 2004
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
Do CGT assets held by an association incorporated under the ACT Associations Incorporation Act 1991 , whose constitution has at all times prevented it from making any form of distribution to its members, stop being pre-CGT assets under subsection 149-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997) when the association changes registration to a company under the Corporations Act 2001 (Corporations Act) and has similar restrictions in its constitution?

Decision
No. To the extent that the incorporated association has CGT assets that were acquired before 20 September 1985, those assets will not stop being pre-CGT assets under subsection 149-30(1) of the ITAA 1997 upon registration as a company under the Corporations Act.

Facts
The taxpayer is an association, incorporated under the ACT Associations Incorporation Act, whose constitution has at all times prevented it from making any distribution whether in money, property or otherwise, to its members. The association is to convert to a company under the Corporations Act. Upon conversion, its constitution will prevent it from making any distribution whether in money, property or otherwise, to its members. The association is not an exempt entity for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997.

Reasons for decision
Summary: Subdivision 149-B of the ITAA 1997 provides that an asset of a non-public entity stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by the same ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985 (subsection 149-30(1) of the ITAA 1997). Subsection 149-15(1) of the ITAA 1997 defines 'majority underlying interests' in a CGT asset to consist of more than 50% of the beneficial interests held, directly or indirectly, in the asset and any income that may be derived from it. 'Ultimate owner' is defined in subsection 149-15(3) of the ITAA 1997 to include a company whose constitution prevents it from making any distribution, whether in money, property or otherwise, to its members. The definition of 'company' in section 995-1 of the ITAA 1997 would include an incorporated association. Because the incorporated association's constitution has, at all times, prevented it from making any form of distribution to its members, it is considered to be an 'ultimate owner'. Consequently, the pre-CGT status of any CGT assets acquired by the association before 20 September 1985 will be maintained immediately before conversion as the same ultimate owner held majority underlying interests in the assets at all times. On conversion, the company's constitution will prevent it from making any distribution to its members so it will also be the ultimate owner of its assets. As incorporation under the Corporations Act does not create a new legal entity (under paragraph 601BM(1)(a) of Part 5B.1 of that Act), there will be no change in majority underlying interests held in the pre-CGT assets because they will be held by the same ultimate owner who held those interests immediately before 20 September 1985. Consequently, CGT assets acquired before 20 September 1985 will retain their pre-CGT status on conversion. Section 160ZZS of the ITAA 1936 (rewritten as Subdivision 149-B of the ITAA 1997) applies to pre-CGT assets before the start of the 1998-99 income year and, for the purposes of this interpretative decision, provides the same outcome.

Legislative references: Income Tax Assessment Act 1936 section 160ZZS
Related ATO interpretative decisions: ATO ID 2002/257
Subject references: Acquisition of CGT assets Capital gains tax CGT assets Majority underlying interests Non profit companies Pre-CGT assets