Private ruling: Capital gains tax – pre-CGT assets – change in major underlying interests
Date of advice: 29 November 2018
Published: March 2019
Ruling period: Financial year ended 30 June 2005
Date scheme commenced: 1 July 2004

Ruling: Q1: Did the issue of XXX A Class shares in the Company to Individual C amount to a change in the majority underlying interests of the Company, and result in the assets of the Company with pre-capital gains tax (pre-CGT) status losing their pre-CGT status? | A1: Yes.

Relevant facts and circumstances: The Company was incorporated before 20 September 1985. Individual A and Individual B were the original directors of the Company. On incorporation Individual A and Individual B, each held one preference share in the Company. Before 20 September 1985 one A Class share in the Company was issued to both Individual A and Individual B. After 20 September 1985, XXX A Class shares in the Company were issued to Individual C. Properties purchased by the Company Date of purchase Purchase Price Land Known as Retrospective Valuation XXXX - after 20 September 1985 Pre-CGT, before 20 September 1985 $XXX,XXX Land 1 $X,XXX,XXX Pre-CGT, before 20 September 1985 $XXX,XXX Land 2 $XXX,XXX Post-CGT, after 20 September 1985 $XXX,XXX Land 3 $XXX,XXX

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

Reasons for decision: Summary: Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the rules which govern when an asset acquired 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 interests 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 consist 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. The definition of ultimate owner in subsection 149-15(3) of the ITAA 1997 includes an individual. In this case, immediately before 20 September 1985 Individual A and Individual B, each held a 50% interest in the Company, holding one Preference share and one A class share in the Company. After 20 September 1985, the issuing of XXX A class shares to Individual C resulted in a direct value shift under Division 725 of the ITAA 1997. CGT event K8 happened at that time. As the shares Individual A and Individual B held in the Company were pre-CGT assets the capital gains they made on the direct value shift were disregarded in accordance with subsection 104-250(5) of the ITAA 1997. However, from this point in time, the majority underlying interests in the Company, and consequently Land 1 and Land 2, were no longer held by Individual A and Individual B. The major underlying interests in the properties had been transferred to Individual C. As there was a change in the major underlying interests in the Company, and consequently in Land 1 and Land 2, when the A class shares were issued to Individual C, Land 1 and Land 2 stopped being pre-CGT assets under subsection 149-30(1) of the ITAA 1997 at that time.