Private ruling: Capital Gains Tax - Division 149 - majority underlying ownership test - public entity
Published: December 2014
Ruling period: A specified period
Date scheme commenced: A specified date

Ruling: Q1: For the purposes of section 149-60(1) of the Income Tax Assessment Act 1997, on the basis of the evidence provided, is the Commissioner satisfied that, or thinks it reasonable to assume that, in respect of the test day 30 June 2014, the majority underlying interests in the assets of the taxpayer were held by the ultimate owners who also held the majority underlying interests in the assets immediately before 20 September 1985? | A1: Yes | Q2: For the purposes of section 149-60(1) of the Income Tax Assessment Act 1997, on the basis of the evidence provided, is the Commissioner also satisfied that, or thinks it reasonable to assume that, in respect of the test day 30 June 2014, majority underlying interests in the assets of the 100% owned subsidiaries of the taxpayer, namely X, Y and Z were held by the ultimate owners who also held the majority of underlying interests in the assets immediately before 20 September 1985? | A2: Yes

Relevant facts and circumstances: The taxpayer has chosen x July 1985 as the starting day. The test day is xx June 2014. Ordinary shares and preference shares were quoted on the ASX on the starting day and on the test day. Preference shares have been treated as having the same rights as ordinary shares. There has been no abnormal trading. The evidence provided indicates that the taxpayer had three major shareholders that held shares continuously since the start day. The evidence provided indicates that there are a number of individual shareholders in the top 100 ordinary shareholders that have held ordinary shares in the taxpayer continuously since the start day. The evidence provided indicates that there are two individual preference shareholders in the top 20 individual preference shareholders that have held preference shares in the taxpayer since the start day. Two of the major shareholders are companies - Company A and Company B. Company A is owned by a discretionary trust. The trust was established for the benefit of the members of a particular family. Since establishment the beneficiaries of the trust have been members of that family. No amendments have been made to the trust deed and no additional beneficiaries have been appointed since the start day. The trustees continue to administer the trust for the benefit of the members of the same particular family. All distributions have been made to or for the benefit of the abovementioned beneficiaries. No distributions have been made to an interposed entity that subsequently distributed amounts to or for the benefit of the family. Company B has at all times been held by the same shareholders. The taxpayer has three subsidiary companies - Company X, Company Y and Company Z. The taxpayer has owned 100% of the in Company X since the start day. The taxpayer owned xx% of the shares in Company Y from the start day until sometime in 19xx. Since 19xx, the taxpayer has owned 100% of the shares in Company Y. The taxpayer has held 100% of the ordinary shares in Company Z since the start day. The taxpayer has also owned xx% of the preference shares in Company Z since the start day until sometime in 20xx. The taxpayer now owns all the shares in Company Z. The taxpayer holds shares in Company C and Company C owns shares in that taxpayer resulting in a cross shareholding.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1997 Subdivision 149-C | Income Tax Assessment Act 1997 section 149-15 | Income Tax Assessment Act 1997 subsection 149-15(3) | Income Tax Assessment Act 1997 paragraph 149-15(3)(a) | Income Tax Assessment Act 1997 subsection 149-15(4) | Income Tax Assessment Act 1997 subsection 149-15(5) | Income Tax Assessment Act 1997 subsection 149-55(1) | Income Tax Assessment Act 1997 subsection 149-55(2) | Income Tax Assessment Act 1997 subsection 149-60(1) | Income Tax Assessment Act 1997 subsection 149-60(2) | Income Tax Assessment Act 1997 subsection 149-60(4)

Reasons for decision: Summary: On the basis of the evidence provided, the Commissioner is satisfied that in respect of the test day xx June 2014, the majority underlying interests in the assets of the taxpayer were held by the ultimate owners who, immediately before 20 September 1985, also held the majority of underlying interests. | Detailed Reasoning - Legislative Overview: Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) determines when an asset stops being a pre-CGT asset. Subdivision 149-C of the ITAA 1997 contains the rules that apply to public entities. As provided at subsection 149-55(1) of the ITAA 1997, a public entity that wishes to preserve the pre-CGT status of its assets must provide written evidence, within six months after each test day, to satisfy the Commissioner, or from which the Commissioner thinks it reasonable to assume, that the majority underlying interests have been maintained. Per subsection 149-60(1) of the ITAA 1997, the Commissioner must be satisfied or think it reasonable to assume, based solely on the evidence provided under subsection 149-55(1) of the ITAA 1997, that at the end of a test day majority underlying interests in the assets were had by the same ultimate owners that had majority underlying interests in the assets at the end of the starting day. Subsection 149-60(2) of the ITAA 1997 provides the starting day is a day chosen by the entity that is no earlier than 1 July 1985 and no later than 30 June 1986 or, if no day is so chosen, 19 September 1985. The day chosen must be one where the choice of which will allow evidence to be given that enables a reasonable approximation of the ultimate owners who had underlying interests in the assets of the entity at the end of 19 September 1985. Subsection 149-60(4) of the ITAA 1997 allows a new owner to stand in the shoes of a former owner where they have acquired a percentage of the underlying interests in the asset because of the death of the former ultimate owner. In such cases, the new owner is treated as having held the underlying interest for the same time that the former owner had held the interest. Subsection 149-55(2) provides that each of the following is a test day for the purposes of subsection 149-55(1) of the ITAA 1997: • 30 June 1999; • a day that is 5 years (or multiples of that time) after the 30 June 1999; • a day on which there is abnormal trading in the shares of the company. The terms majority underlying interests, underlying interests and ultimate owner are central to the operation of both Division 149 and Subdivision 149-C of the ITAA 1997. Per section 149-15 of the ITAA 1997, majority underlying interests in a pre-CGT asset consists of more than 50% of the beneficial interests in the asset and in any ordinary income that may be derived from the asset held (whether directly or indirectly) by ultimate owners. Further, an underlying interest in a pre-CGT asset is a beneficial interest that an ultimate owner has, directly or indirectly, in the asset or in any ordinary income that may be derived from it. An ultimate owner includes individuals, certain government bodies and companies whose constitutions prevent distributions of any kind to their members. Subsection 149-15(4) of the ITAA 1997 provides that an ultimate owner indirectly has a beneficial interest in a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of the capital of the other entity if: (a) the other entity were to distribute any of its capital, and (b) the capital were then successively distributed by each entity interposed between the other entity and the ultimate owner. Similarly, subsection 149-15(5) of the ITAA 1997 provides that an ultimate owner indirectly has a beneficial interest in ordinary income that may be derived from a CGT asset of another entity (that is not an ultimate owner) if he, she or it would receive for his, her or its own benefit any of a dividend or income if: (a) the other entity were to pay that dividend, or otherwise distribute that income, and (b) the dividend or income were then successively paid or distributed by each entity interposed between the other entity and the ultimate owner. Subsections 149-15(4) and (5) of the ITAA 1997 test the existence of indirect beneficial interests by respectively hypothesising that an individual would receive for his or her own benefit any capital or dividends or income distributed by an entity and successively distributed through each interposed entity. A company whose constitution does not prevent distributions of any kind to its members does not satisfy the definition of 'ultimate owner'. The shareholding profile of the company must be examined in such cases to determine ultimate ownership. A discretionary trust also does not satisfy the definition of 'ultimate owner'. Consequently, where interests are held by a discretionary trust, it is necessary to look through the trust to determine whether majority underlying interests have been maintained. To satisfy subsection 149-60(1) of the ITAA 1997, ultimate owners must have a beneficial interest in the asset. However, at common law, an individual beneficiary of a discretionary family trust does not have an interest in the assets or income of the trust. Taxation Ruling TR 2004/7 Income tax: capital gains: application of Division 149 of the Income Tax Assessment Act 1997 and Division 20 of Part IIIA of the Income Tax Assessment Act 1936 to public entities (which finalises Draft Taxation Ruling TR 1999/D9) addresses issues that affect public entities when applying Division 149 of the ITAA 1997, provides that the tracing of underlying interests in an entity's pre-CGT assets where a family discretionary trust has shares in that entity must be considered on a case by case basis. Taxation Ruling IT 2340: Income Tax: Capital Gains: Deemed acquisition of assets by a taxpayer after 19 September 1985 where a change occurs in the underlying ownership of assets acquired by the taxpayer on or before that date (IT 2340) may offer assistance in such cases. IT 2340 provides guidance for trustees of discretionary family trusts in determining whether the pre-CGT status of trust assets is maintained under section 160ZZS of the ITAA 1936 (the provisions which preceded Division 149 of the ITAA 1997). Paragraph 5 of IT 2340 explains that the manner in which the discretionary powers of the trustee are exercised will be relevant when considering whether there has been a change in the majority underlying interests of the assets of the discretionary trust. IT 2340 further states: ' 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. ' Accordingly, where interests are held by a discretionary trust, in considering the question of whether majority underlying interests have been maintained, it will be relevant to take into account the way the trustee has exercised their power and for whose benefit the trustee administers the trust. Where beneficiaries have not changed over time it may be reasonable for the Commissioner to assume that there has been no change in the underlying interests in the assets of the trust and therefore that the interests held by the trust has been held by the same ultimate owners at the relevant times. | Detailed Reasoning - Application to the taxpayer's circumstances: The taxpayer has chosen a starting day of x July 1985. The taxpayer has stated that no abnormal trading has occurred. The test day is xx June 2014. The evidence provided by the taxpayer shows that Company A and Company B have been substantial holders of ordinary shares in the taxpayer from the start day. Additionally, the taxpayer has included the shareholdings of certain individual shareholders that have held ordinary shares. The Commissioner has disregarded some of the individual shareholders, only the individual shareholders who held shares at the starting day and at the test day have been included in the calculations. The taxpayer has also advised of crossholding shares. From the evidence provided, the effect of these shares being excluded from the calculations does not preclude the continuity of majority underlying interests test from being satisfied and so have been included in the calculations. On the basis of the evidence provided the Commissioner is satisfied that more than 50% of the shareholding in the taxpayer has been maintained by the same shareholders at the relevant times. However, as Company A and Company B cannot be ultimate owners as prescribed by section 149-15 of the ITAA 1997, the calculation of majority underlying interests in the pre-CGT assets held by the taxpayer will turn on establishing the total beneficial interests that the ultimate owners of Company A and Company B held at the end of x July 1985 and xx June 2014. | Detailed Reasoning - Ultimate owner of Company A: On the facts provided and apart from x redeemable preference share held by an individual, Company A has at all material times been owned by a family discretionary trust. As a trust cannot be an ultimate owner as prescribed by subsection 149-15(3) of the ITAA 1997, in order to establish the beneficial underlying interest in Company A, it is necessary to look through the trust to determine ultimate ownership. The trust is a discretionary trust that was established for the benefit of a particular family. The beneficiaries of the trust have been the members of that family. All distributions have been made to or for the benefit of these beneficiaries. Since the death of a beneficiary, distributions have been made to or for the benefit of the other beneficiaries. Since x July 1985 the terms of the trust and the terms defining the identity of the beneficiaries have not changed. The trust has at all times since the starting day been administered for the benefit of the family members of the same particular family. The beneficiaries of the trust are ultimate owners as prescribed by paragraph 149-15(3)(a) of the ITAA 1997. Having regard to the above, it is considered that the beneficiaries have not changed over time and it is reasonable to assume that there has been no change in the underlying interest in the assets and income of the trust. Accordingly, it is reasonable to conclude that there has been continuity in the majority underlying ownership of Company A and Company A's interest in the taxpayer has been held by the same ultimate owners at the relevant times. | Detailed Reasoning - Ultimate owner of Company B: The facts as provided show that at all material times Company B has been owned by the same shareholders. The shareholders are ultimate owners as prescribed by paragraph 149-15(3)(a) of the ITAA 1997. Accordingly, on the facts provided, the shareholders are taken to have held at all material times 100% of the underlying interests in Company A. | Detailed Reasoning - Conclusion: In respect of the test day of xx June 2014 the majority underlying interests in the assets of the taxpayer were held by the ultimate owners of company A and the ultimate owners of company B (beneficiaries of the trust), and these are the same ultimate owners of the majority of the underlying interests immediately before 20 September 1985. | Summary: On the basis of the evidence provided, the Commissioner is satisfied that, in respect of the test day xx June 2014, majority underlying interests in the assets of the 100% owned subsidiaries of the taxpayer, Company X, Company Y and Company Z were held by the ultimate owners who, immediately before 20 September 1985, held majority underlying interests in the assets. | Detailed Reasoning - Detailed reasoning: The taxpayer has three subsidiary companies - Company X, Company Y and Company Z. The taxpayer has owned xx% of the in Company X since xx June 1985. The taxpayer owned xx% of the shares in Company Y from xx June 1985 until sometime in 19xx. Since 19xx, the taxpayer has owned xx% of the shares in Company Y. The taxpayer has held xx% of the ordinary shares in Company Z since xx June 1985. The taxpayer has also owned xx% of the preference shares in Company Z since xx June 1985 until sometime in 20xx. The taxpayer now owns all the shares in Company Z. | Detailed Reasoning - Conclusion: On the basis that the Commissioner is satisfied that majority underlying interests in the assets of the taxpayer have been held continuously by the same ultimate owners, the Commissioner is satisfied that in respect of the test day xx June 2014 that the majority underlying interests in the assets of the 100% owned subsidiaries of the taxpayer, namely Companies X, Y and Z were held by the ultimate owners who, immediately before 20 September 1985, held majority underlying interests in the assets.