Private ruling: Majority Underlying Interest
Published: June 2015
Ruling period: Year ending 30 June 2015 | Year ending 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Will Division 149 of the ITAA 1997 be triggered if the shares are transferred to the shareholders respective family trusts? | No


Relevant legislative provisions: Income Tax Assessment Act 1997 Division 149

Reasons for decision: Summary: Subsections 149-30(1) and 149-30(1A) of the Income Tax Assessment Act 1997 (ITAA 1997) provide that an asset stops being a pre-capital gains tax (CGT) asset at the earliest time when majority underlying interests in the asset were not held by the ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of: (a) the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset, and (b) the beneficial interests that ultimate owners have (whether directly or indirectly) in any income that may be derived from the asset. Accordingly, ultimate owners who held majority underlying interests in an asset just before 20 September 1985 must retain such interests after that date; otherwise Division 149 of the ITAA 1997 will be triggered to convert the asset into a post-CGT asset. Subsections 149-30(3) and 149-30(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 by way of a marriage breakdown rollover or because of the death of a person (former owner), the 'new owner' is treated as having held the underlying interest of the 'former owner' for the period the 'former owner' held them. Subsection 149-15(5) of the ITAA 1997 states that an ultimate owner indirectly has a beneficial interest in ordinary income that may be derived from a CGT asset or 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 and the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner. | Detailed Reasoning - Discretionary trusts and majority underlying interests: Taxation Ruling IT 2340 discusses the terms underlying interest and majority underlying interest, and former section 160ZZS of the Income Tax Assessment Act 1936 (since replaced by section 149-30 of the ITAA 1997). Paragraph 2 of IT 2340, advocates a look through approach in relation to chains of companies, partnerships and trusts in order to determine whether there has been a change in the effective interests of natural persons in the assets. Where shares in a company are held by the trustee of a discretionary trust, the shares are not beneficially owned by any persons. This creates difficulties when assessing whether the majority underlying beneficial interest in an asset is maintained. In this regard, paragraph 6 of IT 2340 requires the taxpayer to show that the trustee has administered the trust for the benefit of members of a particular family at all times during the relevant years of income. Furthermore, in accordance with paragraph 8 of IT 2340, the trustee must not have exercised discretionary powers to appoint beneficiaries or amend the trust deed that would result in a practical change of 50% or more underlying interests in the trust assets. The issue of what constitutes 'one family' for the purposes of IT 2340 must be considered based on the facts of the particular cases. What is often described as an 'extended' family (that is, including grandparents, children, grandchildren and their spouses) would ordinarily qualify as a 'family' for these purposes. Further, if distributions are made to post-19 September 1985 additions to a family (for example, the birth of new family members and new persons joining a family through marriage), the 'family' distribution criteria would ordinarily be satisfied. | Detailed Reasoning - Application to your circumstances: The transfer of the shares on the death does not change the underlying interest in the company. The original shareholders will be the specified primary individuals of their respective family trusts for the purpose of the family trust election. In addition the former shareholders will also be nominated beneficiaries of the respective trusts (in addition to other family members). The total number of shares on issue before the transfer is X shares. After the transfer of the shares, the majority of the original pre CGT shares will still be held by the same individual. Based on the above, Division 149 will not be triggered when the shares are transferred to the respective trusts as the majority of underlying interest will have been maintained.

Relevant facts: The company is a private company. | Under the Memorandum and Articles of the company the directors have the power to determine from time to time what dividends may be declared: | 1. On one or more classes of shares to the exclusion of others | 2. At different rates on different classes of shares | 3. On any particular share or shares to the exclusion of other shares | All the shareholders have held their shares pre 20 September 1985 ('pre-CGT'). | One shareholder acquired some of their ordinary shares from their spouse on death; the spouse had held the ordinary shares pre-CGT. | All shares have rights under a winding up of the company. | The company is a passive investor holding a mix of pre-CGT and post-CGT assets. | The shares have been held by each of the relevant shareholders on capital account. | The market value of post-CGT property held by the company may exceed 75% of the net value of the company, however, until such time that the transfers of shares are effected under the plan; the CGT consequences will not be known. In any event, the individual shareholders will report any CGT liability in their respective tax returns when the CGT event occurs. | The shareholders have decided to consider a reorganisation of the company. | Individual shareholders and have decided that the best way to achieve this succession planning is to transfer their shares into their respective family discretionary trusts. | The individual shareholders propose to transfer their shares to their respective family trusts for nominal consideration. | The family trusts will be discretionary trusts. | While maintaining their majority shareholding, one shareholder intends to transfer some shares to the other shareholders' family trusts.