Private ruling: Income Tax: Capital Gains Tax - majority underlying interests - pre-CGT asset
Published: May 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Has there been a change in the 'majority underlying interests' of Company A so that Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) would apply to deem a pre-capital gains tax (CGT) asset held by the company to stop being a pre-CGT asset? | A1: No.

Relevant facts and circumstances: Company A purchased a residential property prior to 20 September 1985. It has been renting this property since ownership. Shareholder A has been director of Company A since 197x. The shareholders of Company A are: • Company B xx,xxx ordinary shares • Shareholder A 1 ordinary share • Shareholder B 1 ordinary share • Superannuation Fund 1 preference share. Company B was registered prior to 20 September 1985. Shareholder A has been the director and secretary of Company B since that year. Shareholder B became a director of Company B in late 19xx. The shareholders of Company B immediately before 20 September 1985 were: • Shareholder C 1 ordinary share • Shareholder D 1 ordinary share. The Australia Securities and Investments Commission (ASIC) Current & Historical Company Extract provided for Company B indicates that these shares were "beneficially held" by Shareholder C and Shareholder D. However, statutory declarations have been provided by both Shareholder C and Shareholder D to declare that they each held one share on behalf of Shareholder A. In certain monthr 20xx Company B Pty Ltd restructured its shares. According to ASIC documents provided, in relation to the share restructure, one share was cancelled. However, you have advised that this form was completed incorrectly and its intention was as follows: • Shareholder C handed over the share that they were holding on behalf of Shareholder A to Shareholder A, and • Shareholder D who was holding their share on behalf of Shareholder A handed their share to Shareholder B. Shareholder B now holds the share on behalf of Shareholder A. The shareholders of Company B after the restructure are: • Shareholder A 1 ordinary share • Shareholder B 1 ordinary share. The ASIC Current & Historical Company Extract provided for Company B indicates that the share held by Shareholder B is not "beneficially held". A statutory declaration has also been provided by Shareholder B to declare that they held one share on behalf of Shareholder A. A statutory declaration has also been provided by Shareholder A to declare that Shareholder C, Shareholder B and Shareholder D each held their share in Company B in trust for Shareholder A. Company A wants to sell the house to its director Shareholder A for its market value.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1997 section 149-10 | Income Tax Assessment Act 1997 section 149-15 | Income Tax Assessment Act 1997 section 149-30

Reasons for decision: Summary: There has not been a change in the 'majority underlying interests' of Company A. Therefore, Division 149 of the ITAA 1997 would not apply to deem a pre-CGT asset held by the company to stop being a pre-CGT asset. | Detailed Reasoning - Detailed reasoning: For the asset to maintain its status as a pre-CGT asset the majority underlying interests in the asset must continue to be held by the same ultimate owners who held those interests in the asset immediately before 20 September 1985 (subsection 149-30(1) of the ITAA 1997). A CGT asset is a pre-CGT asset if the conditions in section 149-10 of the ITAA 1997 are met. Section 149-10 of the ITAA 1997 states: A CGT asset that an entity owns is a pre-CGT asset if, and only if: (a) the entity last acquired the asset before 20 September 1985; and (b) the entity was not, immediately before the start of the 1998-99 income year, taken under: (i) subsection 160ZZS(1) of the Income Tax Assessment Act 1936 ; or (ii) Subdivision C of Division 20 of Part IIIA of that Act; to have acquired the asset on or after 20 September 1985; and (c) the asset has not stopped being a pre-CGT asset of the entity because of this Division. Subsection 149-15(1) of the ITAA 1997 defines majority underlying interests as: (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. 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 includes an individual under subsection 149-15(3) of the ITAA 1997. Assistance is also provided in Income Tax Ruling IT 2340 where the terms 'underlying interest' and 'majority underlying interest' and section 160ZZS of the Income Tax Assessment Act 1936 , the precursor to section 149-30 of the ITAA 1997, are discussed.. IT 2340 states: 2. The terms "underlying interest" and "majority underlying interests", on the basis of which the provision operates, have the same meanings as they have in Subdivision G of Division 3 of Part III of the Act - which deals with the income tax treatment of interest in relation to "negatively geared" investments in rental property. In both cases (and like provisions of the Act concerned with the measurement of ownership interests) underlying interests in relation to the assets concerned mean beneficial interests held by natural persons, whether directly or through one or more interposed companies, partnerships or trusts. The clear policy of the law thus permits and requires that, for the purposes of the relevant provisions, chains of companies, partnerships and trusts are to be "looked through" in order to determine whether there has been a change in the effective interests of natural persons in the assets [emphasis added]. Subsections 149-15(4) and (5) of the ITAA 1997 establish when an ultimate owner indirectly has a beneficial interest in the pre-CGT asset of another entity. To have a beneficial interest, the ultimate owner must be entitled to receive for their own benefit any distribution of capital or income if: (a) the other entity were to distribute any of its capital or income; and (b) the capital and income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner. Company A purchased a residential property prior to 20 September 1985. Company B has been the ultimate holding company of Company A since before 20 September 1985. The shareholders of Company B immediately before 20 September 1985 were Shareholder C and Shareholder D. You have advised that they each held 1 ordinary share in Company B on behalf of Shareholder A. As Shareholder A is the beneficial owner of all shares A is the ultimate owner of Company B and therefore indirectly held the majority underlying interest in the asset at this time. In certain month 20xx Company B restructured it shares. As a result the shareholders are now Shareholder A and Shareholder B. However, as Shareholder B holds their share on behalf of Shareholder A shareholder B is not the beneficial owner. As above, Shareholder A is the beneficial owner of both shares and the ultimate owner of Company B. A continues to the hold the majority underlying interest in the asset. As Shareholder A is the ultimate owner of Company B both immediately before 20 September 1985 and after the restructure in certain month 20xx, it can be determined that the majority underlying interest in the asset has not changed. Therefore, Division 149 of the ITAA 1997 would not apply to deem a pre-CGT asset held by the company from being a pre-CGT asset at this time.