ATO ID 2011/107: Capital Gains Tax: Division 149 majority underlying interests - new shareholder
Date of decision: 20 November 2011
Year of income: Year ended 30 June 2007
Business line: Public Groups and International

Issue
For the purposes of Subdivision 149-B of the Income Tax Assessment Act 1997 (ITAA 1997) in a company where all the shares carry a discretionary right to dividends are majority underlying interests in an asset had by ultimate owners who had such interests in the asset immediately before 20 September 1985 if after that date a new share with discretionary rights to dividends is issued to a new shareholder?

Decision
No, majority underlying interests in an asset are not had by ultimate owners who had such interests in the asset immediately before 20 September 1985 if after that date new shares with discretionary rights to dividends are issued to a new shareholder.

Facts
Immediately prior to 20 September 1985 the shareholders of Company B are Companies E, R and T. Individual X owns all the shares in Company E, individual Y owns all the shares in company R and individual Z owns all the shares in Company T. Company B owns a pre-CGT asset. All issued shares in company B have discretionary rights as to dividends. All issued shares in company B carry the same rights as to the capital of company B. Subsequent to 19 September 1985 the company issues a further share, with discretionary rights to dividends to Company H. The sole shareholder in Company H is T the trustee of a trust (T) for which the entitlement of beneficiaries to income and capital is not immediately ascertainable. The beneficiaries are selected from a nominated class by the trustee. The class of beneficiary includes individual X, their spouse, children and grandchildren.

Reasons for decision
Summary: Subsection 149-30(1) of the ITAA 1997 provides that 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. 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). An ultimate owner indirectly has a beneficial interest in ordinary income that may be derived from a CGT asset of another entity if he she or it would receive for his her or its own benefit any of a dividend or income if the other entity were to pay that dividend or otherwise distribute that income (subsection 149-15(5) of the ITAA 1997). Whilst the receipt of a share of the ordinary income that may be derived from the asset of the company is at the discretion of the company, between them, the shareholders X, Y and Z collectively held all of the beneficial interests in the income just before 20 September 1985. However, the issue of a share to Company H introduced a new shareholder in whose favour a distribution of income could be made. Due to the discretionary right to dividends which all shares carry, Company B can distribute the dividends to one shareholder to the exclusion of the other shareholders. This means that Company B could pay 100% of any dividends to Company H, who in turn could distribute it to T, who in turn could distribute it to any of the individuals who are members of the class of beneficiaries. Accordingly, the possibility exists that the ultimate owners (individuals X, Y and Z) who between them collectively had majority underlying interests in the asset immediately before 20 September 1985 may receive less than 50% of the ordinary income that may be derived by Company B from the asset. Subsection 149-30(2) of the ITAA 1997 provides that 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. Due to the discretionary right to dividends which all shares carry, Company B could pay 100% of any dividend to Company H, which could in turn pay 100% of any dividend to T, which could in turn pay 100% of any benefit to any beneficiary within the class of beneficiaries. Following the change in shareholding, the Commissioner cannot be satisfied, or find it reasonable to assume, that more than 50% of the beneficial interests in the income of Company B and therefore majority underlying interests have been held at all times by the same ultimate owners who held such interests immediately before 20 September 1985.

Legislative references: Income Tax Assessment Act 1997 Subdivision 149-B subsection 149-15(2) subsection 149-30(1) subsection 149-30(1A) subsection 149-30(2)
Related ATO interpretative decisions: ATO ID 2011/101
Subject references: Capital gains tax CGT assets Pre-CGT assets Majority underlying interests