Private ruling: Division 149 underlying interests
Date of advice: 5 November 2018
Published: February 2019
Ruling period: Financial year ending 30 June 2018
Date scheme commenced: 1965

Ruling: Q1: Have the majority underlying interests in the pre-capital gains tax (CGT) assets changed since immediately before 20 September 1985 such that section 149-30 of the Income Tax Assessment Act 1997 (ITAA 1997) will stop the asset from being a pre-CGT asset? | A1: No

Relevant facts and circumstances: The Company is an Australian Proprietary Limited entity which was incorporated in the 1960s; pre-capital gains tax (CGT). Details of the relevant assets have been provided. There were originally a number of shareholders who passed away over time and their beneficiaries have absorbed their shares under a family structure. The Company is considering selling all its investments and distributing funds to its shareholders by way of voluntary liquidation. All shareholders have always been Australian resident taxpayers whilst holding their shares in the Company. Current values of pre and post-CGT shares have been provided. There have been no improvements made to the assets. The shares of the Company are currently and have always historically been held wholly by members of a family group. Details of the Company’s constitution have been provided. Immediately before 20 September 1985, the number of shareholders had reduced as Shareholder A had passed away some time before. The only additional shareholders added since 20 September 1985 have been related to the original shareholders. Following the death of another shareholder more recently, the shares of the Company were split to allow the beneficiaries of that deceased shareholder to receive an equal proportion of shares under the will. The split created a larger amount of shares for the existing shareholders in proportion to their holdings. There have been no other transfers or issues of shares in the Company.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 149-30(1) | Income Tax Assessment Act 1997 Subsection 149-30(2) | Income Tax Assessment Act 1997 Subsection 149-30(3) | Income Tax Assessment Act 1997 Subsection 149-30(4) Summary | The majority underlying interests in the pre-CGT assets of the Company have been held at all times by the same ultimate owners who held such interests immediately before 20 September 1985. | Detailed reasoning | 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. | Majority underlying interests in a CGT asset consist of: | 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 (subsection 149-15(1)) | 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)). | 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, subsection 149-30(1) will not apply. | Subsections 149-30(3) and (4) of the ITAA 1997 provide that if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner because of the death of a person (former owner), the new owner is treated as having held the underlying interest of the former owner over the years. | Beneficial interests that ultimate owners have in the asset (rights to capital) | The Company constitution provided that on winding up, the J, K, L, M and N class shares entitle their respective holders to an equal share of the assets of the company. No other shares had these rights to capital. | Paragraphs 1 and 2 of TD 2000/10 state that if a company converts its shares to a larger number of shares a CGT event does not happen to the shareholder's original shares for capital gains purposes. While there is a change in the form of the original shares, there is no change in their beneficial ownership. | Further, the converted shares have the same date of acquisition as the original shares to which they relate. For example, if the original shares were acquired before 20 September 1985 (pre-CGT shares), the converted shares have the same acquisition date. | In the current case, share split created a larger amount of shares for the existing shareholders in proportion to their holdings. Although, a 20% proportion of the shares (in total) with rights to capital were issued to the beneficiaries under the will, the new owners are treated as having held the underlying interest of the former owner over the years as per subsections 149-30(3) and (4) of the ITAA 1997. | Therefore, the share split did not result in any change to majority underlying interests and Division 149 was not triggered. | There have been no other post 1985 changes to the Company shares with rights to capital. | Beneficial interests that ultimate owners have in any income that may be derived from the asset | In the current case, the Company was formed in pre-CGT as a vehicle to distribute investment income to the members of the one family group over subsequent years. | To this end, it is clear that the constitution was formulated to allow for the distribution of dividend income to various share classes that altered with the death of the older family members over the years without the need for any further company resolutions or constitutional changes. | In regard to the intent and operation of the majority underlying interest provisions in the former Division 149 in relation to trusts, paragraphs 6 to 8 of IT 2340 explain that where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring the former Division 149 into application merely because distributions to family members who are beneficiaries are made in such amounts and to such of those beneficiaries as the trustee determines in the exercise of his discretion. | In such a case the Commissioner would find it reasonable to assume that the majority underlying interests in the trust assets have not changed. That is consistent with the role of the provision to close potential avenues for avoidance of tax in cases where there is a substantial change in underlying ownership of assets. | On the other hand where, by the exercise of a trustee's discretionary powers to appoint beneficiaries or by amendment of the trust deed, there is in practical effect a change of 50% or more in the underlying interests in the trust assets, such as where the members of a new family are substituted as recipients of distributions from the trust in place of persons who were formerly the object of such distributions, the majority underlying interest provisions would apply. | ATO ID 2011/101 provides an example of where all existing shares in a company have discretionary rights to dividends and also equal rights to capital, and there is no additional share in the company issued after 19 September 1985. In this case, the Commissioner would consider it reasonable to assume that there had been no change in the majority underlying interests. | This contrasts with ATO ID 2011/107 where an additional share was issued which meant that due to the discretionary nature of the dividend payments, it was possible for dividends to be paid to the new shareholder to the exclusion of some or all of all other shareholders. Therefore, in this case, the Commissioner could not be satisfied that there had been no change in the majority underlying interests. | In the current case, all the current family group shareholders were shareholders in the Company immediately before 20 September 1985 with the exception of the additional family shareholders that were recently added through the death of an existing shareholder. As previously mentioned, subsections 149-30(3) and (4) of the ITAA 1997 provide that the new owners are treated as having held the underlying interest of the former owner over the years so that there are no Division 149 implications. | Further, the Company constitution in place just before 20 September 1985 specified how dividends were to be paid to particular classes of shares taking into account the death of older family members over the years. Consequently, although the underlying interests of shareholders entitled to receive dividends changed over the years, this was mandated by the constitution and not brought about by any discretionary action by the Company directors, for example. This situation is consistent with the example in IT 2340, as mentioned above, where a change in the proportion of distributions to existing members of the same family group would not trigger Division 149. | Therefore, the Commissioner is satisfied that majority underlying interests in the pre-CGT assets of the Company have been held at all times by the same ultimate owners who held such interests immediately before 20 September 1985.