Private ruling: Major underlying interest in a pre-CGT asset
Date of advice: 26 March 2021
Published: May 2021
Ruling period: Financial year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the Commissioner satisfied, or thinks it reasonable to assume, that the property held by the Company remains a pre capital gains tax (CGT) asset pursuant to subsection 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The Company is a private company that was incorporated prior to 20 September 1985. The Company acquired the Asset prior to 20 September 1985. Immediately before 20 September 1985 the Company had the following share ownership: • Ordinary shares (voting rights, no entitlements to distributions) on issue equally to individuals A, B & C. • A Class shares (no voting rights, discretionary dividend rights and entitlements to distribution of or assets of the Company) on issue equally to 3 family companies. Immediately before 20 September 1985 each family company had the same share structure with shares on issue to Individuals A, B and C as well as the individuals' spouses and children (including on trust). In the subsequent period to the current time, multiple changes occurred in the share ownership of the company summarised as follows: • Ownership interests held by the children (including on trust) were discontinued with their respective share interest concentrating with the remaining owners. • The shares held by Individual B's first spouse were transferred to the Individual B's sibling on trust for Individual B. • The family companies were liquidated and the discretionary dividend shares on issue were redistributed to the remaining owners in addition to Individual B's new spouse. • As a result of death, the shares held by both Individual A and C shares were transferred to their respective spouses. • Pursuant to a court order resulting from their marriage breakdown, shares held by Individual B's second spouse where transferred to Individual B. The taxpayer is contemplating a disposal of the Property to a third party.

Relevant legislative provisions: Section 149-30 of the Income Tax Assessment Act 1997 | Section 149-15 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Division 149 of the ITAA 1997 discusses when an asset stops being a pre-CGT asset. Subdivision 149-B of the ITAA 1997 relevantly discusses when an asset of a non-public entity, such as a private company, stops being a pre-CGT asset. Subsection 149-30(1) of the ITAA 1997 states that the asset stops being a pre-CGT asset at the earliest time when the 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 (MUIs) are defined at section 149-15 of the ITAA 1997. MUIs consist of more than 50% of the beneficial interests that ultimate owners (in this case individuals in accordance with subsection 149-15(3) of the ITAA 1997) have, whether directly or indirectly, in: a) the asset; and b) in any ordinary income that may be derived from the asset. Subsection 149-30(1) of the ITAA 1997 will also not apply, if the Commissioner is satisfied, or thinks it is reasonable to assume that the majority underlying interests have not changed (subsection 149-30(2) of the ITAA 1997). The transfer of underlying ownership interest in a pre-CGT asset as a result of a former owner's death or marriage breakdown is ignored for the purposes of subdivision 149 - B (subdivision 149-30(3) and (4) of the ITAA 1997). In this case, due to the discretionary nature of the shares and the change in the way that they were held, it is difficult to apply the factual test with certainty in order to determine whether the majority underlying interest held in the Company has changed. The share ownership previously held by the children (including on trust) that was no longer held, was considered as a change to the underlying ownership interest. As the ownership interest was no longer held, it logically follows that a change has occurred. Additionally, the share issue to Individual B's second spouse was considered as a new interest as this transfer was not of a direct consequence of the marriage breakdown. Any re-distribution among the remaining underlying individual owners was not considered as a change of underlying ownership, nor were transfers as a result of death or marriage breakdown. Analysis of the ownership changes outlined above using the assumption that discretionary dividends were distributed equally, provides that the majority proportion of the shares with rights to dividends from the taxpayer have remained with the same underlying individuals. The Commissioner finds it reasonable to assume, that the majority underlying interests have been held at all times by the same ultimate owners who held the interests immediately before 20 September 1985. Consequently, the Property held by the company retains its pre-CGT status.