Private ruling: Capital gains tax - majority underlying interest
Published: June 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997), to assume that the majority underlying interests in the assets of the company has not changed as a result of the vesting of the trust and the transfer of the C class share to Z? | A1: Yes. | Q2: Does the company's 60% interest in the property retain its pre-CGT status? | A2: Yes.

Relevant facts and circumstances: The trust The trust was established by deed prior to 20 September 1985. Z's late parents, X and Y were appointed joint trustees. X & Y resigned as trustees and the company was appointed trustee by deed of appointment prior to 20 September 1985. All distributions of income of the trust had been made to Z in accordance with the trust deed. The trust vested after 20 September 1985. The company The company was incorporated prior to 20 September 1985 with three classes of shares; A class redeemable preference shares, B class redeemable preference shares and C class ordinary shares. Initially X and Y each held three A class and three B class shares. One C class share was issued to the trust. Changes to the company shareholders subsequent to the company's incorporation are summarised as follows: · After 20 September 1985, one additional A class share and one additional B class share was issued to Z. · When the trust vested, Z as the capital beneficiary under the trust, became presently entitled to the C class share. · On X's death, which occurred after 20 September 1985, Y inherited X's A class and B class shares in accordance with X's will. · On Y's death, which occurred after 20 September 1985, Z inherited all the A class and B class shares in accordance with Y's will. The property The property was originally inherited by X and Y. Prior to 20 September 1985 X and Y transferred a 60% interest in the property to the company. The remaining 40% interest continued to be held by X and Y until: · The death of X, where Y become the sole owner of the 40% interest · Approximately a year later where Y transferred their 40% interest to Z. During the 2010-11 income year the company and Z entered into a contract to sell the property. Sale proceeds were paid to the company and Z in accordance with their ownership interests.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1997 Subsection 149-15(1) | 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(4)

Reasons for decision: Summary: Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the rules which govern when an asset acquired by a taxpayer before 20 September 1985 is treated as being acquired after that date for capital gains tax (CGT) purposes. Under subsection 149-30(1) of the ITAA 1997, a pre-CGT asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interest in the asset were not had by the ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985. Subsection 149-15(1) of the ITAA 1997 provides that majority underlying interests in a CGT asset consists of: · more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and · 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. | Detailed Reasoning - Vesting of the trust: A beneficiary in a discretionary trust, such as the trust, could not be said to have a beneficial interest in the income or assets of the trust, in the light of cases such as Gartside v IRC [1968] AC 553 and Re Weir's Settlement MacPherson & anor v. IRC [1970] 1 All ER 297. However, paragraphs 5 to 7 of Taxation Ruling IT 2340 discuss what happens in respect of non-fixed family trusts and the application of the former section 160ZZS of the Income Tax Assessment Act 1936 (now Division 149 of the ITAA 1997): 5. In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary powers of the trustees are in fact exercised. 6. Where a trustee continues to administer a trust for the benefit of members of a particular family, for example, it will not bring section 160ZZS 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. 7. In such a case the Commissioner would, in terms of sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed. That is consistent with the role of the section to close potential avenues for avoidance of tax in cases where there is a substantial change in underlying ownership of assets and the legislative guidance contained in Subdivision G of Division 3 of Part III of the Act. On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provisions of the Act.' The trust acquired the C class share in the company prior to 20 September 1985. All distributions of income of the trust have been made to Z in accordance with the trust deed. When the trust vested Z became presently entitled to the C class share. Taking the principles contained in IT 2340 into account, the beneficial interest in the C class share is taken to have not changed since before 20 September 1985. Therefore, the vesting of the trust will not change the majority underlying interests in the company's assets. As the majority underlying interests have not changed, the company's 60% ownership share of the property will retain its pre-CGT status subsequent to the trust vesting and the C class share passing to Z. | Detailed Reasoning - Subsequent changes to shareholdings: Subsection 149-30(4) of the ITAA 1997 provides that if an ultimate owner (new owner) has acquired an interest in an asset which is transferred to them as a result of the death of a person (the former owner), the new owner is treated as having held the underlying interest of the former owner over the years. Essentially the new owner will stand in the shoes of the former owners. Y acquired X's shares in the company as a result of X's death. Subsequently, Z acquired all of the remaining shares in the company as a result of Y's death. In accordance with section 149-30 of the ITAA 1997, these changes will not change the majority underlying interest in the company's assets as Z will be taken to stand in the shoes of the former owners. Accordingly, the pre-CGT status of the company's 60% ownership share of the property will remain as the majority underlying interest has not changed since 19 September 1985.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.