Private ruling: Capital gains tax
Date of advice: 12 June 2018
Published: September 2018
Ruling period: Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020 | Year ended 30 June 2021 | Year ended 30 June 2022
Date scheme commenced: 1 July 2017

Ruling: Q1: Will CGT event K6 happen when the property is sold? | A1: No. | Q2: Does Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to treat the property as a post-CGT asset? | A2: No. | Q3: If the building is sold, will the capital gain be disregarded under paragraph 104-10(5) of the ITAA 1997? | A3: Yes. | Q4: If the land is sold (where the building is demolished), will the capital gain be disregarded under paragraph 104-10(5) of the ITAA 1997? | A4: Yes.

Relevant facts and circumstances: You (the trust) are a discretionary trust. The beneficiaries of the trust as set out in the trust deed are a A and B and their children. The trust has at all times since its existence distributed the income/capital of the trust fund to the abovenamed beneficiaries. There has been no amendment to the trust deed that alters the underlying interests or appoints any new beneficiaries. The trust acquired a commercial building before 20 September 1985. The property is held by the trust on capital account. The property has been rented out for the majority of its ownership period. The trust is in the process of selling the property. The trust may also consider demolishing the building and selling the land. When the trust acquired the property it consisted of the current building and the underlying land. Since the ownership of the property commenced there has been no substantial capital improvements made.

Relevant legislative provisions: Income Tax Assessment Act 1997 subdivision 149-B | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-10(5) | Income Tax Assessment Act 1997 section 104-230 | Income Tax Assessment Act 1997 subsection 149-15(1) | Income Tax Assessment Act 1997 section 149-30

Reasons for decision: Summary: Section 104-230 of the ITAA 1997 deals with the disposal of shares in a company or interests in a trust acquired before 20 September 1985. It states CGT event K6 will occur if: a) a taxpayer owns shares in a company or an interest in a trust acquired before 20 September 1985; and b) CGT event A1, C2, E1, E2, E3, E5, E6, E7, E8, J1 or K3 happens in relation to the shares or interest; and c) there is no roll-over in relation to the A1 event; and d) either: i. The market value of the property of the company or trust (that is not trading stock) that was acquired on or after 20 September 1985; or ii. The market value of interests the company or trust owned through interposed companies or trusts in property (except trading stock) that was acquired on or after 20 September 1985, is at least 75% of the net value of the company or trust just before the event happened. If you meet conditions a), b) and c) and, either or both tests described at i) and ii) above, then CGT event K6 will occur. In your case, you are not disposing of shares in a company or an interest in a trust. Therefore CGT event K6 will not occur when you dispose of the property. Under section 149-30 of the ITAA 1997, an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985. Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of: (a) the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and (b) the beneficial interests that ultimate owners have (whether directly or indirectly) in any income that may be derived from the asset. The expression ‘beneficial interests’ as used in the definition of majority underlying interests is not defined. Taxation Ruling IT 2340 reflects an approach of determining which natural persons hold the beneficial interests. Where assets are held by the trustee of a discretionary trust, the assets are not beneficially owned by any persons. This creates difficulties when assessing whether the majority underlying beneficial interest in an asset is maintained. In this regard, paragraphs 6 and 7 of IT 2340 make it clear that if a trustee continues to administer a trust for the benefit of members of a particular family, section 160ZZS of the ITAA 1936 (Subdivision 149-B of ITAA 1997) will not apply. The ruling explains that if there is an amendment to the trust deed which results in a practical effect of a change of more than 50% of the underlying interests of the trust assets, then subsection 160ZZS(1) (Subdivision 149-B of ITAA 1997) would apply. The ruling also states that in considering whether majority underlying interests have been maintained in the assets of a trust it will be relevant to take into account the way in which the discretionary powers of the trustee have been exercised. Application to your circumstances Having regard to IT 2340, it is considered that the majority underlying interests in the property held by the trust have not changed. Consequently Division 149 of the ITAA 1997 would not operate to remove the pre-CGT status of the property held by trust. Accordingly, the property held in the trust will not stop being a pre-CGT asset under section 149-30 of the ITAA 1997. | Detailed Reasoning - Questions 3&4: Section 104-10 of the ITAA 1997 provides that capital gains tax (CGT) event A1 occurs when your ownership in a CGT asset is transferred to another entity. Subsection 104-10(5) of the ITAA 1997 provides that a capital gain or capital loss will be disregarded if the asset was acquired before 20 September 1985. As you acquired the property before 20 September 1985 and Division 149 does not apply the capital gain that arises when the property (with or without the building) is sold will be disregarded.