Private ruling: CGT - changes in majority underlying interests
Published: November 2011
Ruling period: Year ending 30 June 2012.
Date scheme commenced: 1 July 2011.

Ruling: Q1: Has the pre-capital gains tax (CGT) real estate property acquired by you become a post-CGT asset pursuant section 149-30 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: 

Relevant facts and circumstances: The company was incorporated before 1985. There are currently ordinary shares and preference shares on issue. The ordinary shares are voting and participating both with respect to the income and capital. The preference shares are on 7% fixed non-cumulative term with voting rights (one vote per preference share). The 7% fixed non-cumulative term entitles the preference shareholder to a fixed right to a preferential dividend (at 7% of the paid-up amount of the preference shares) if a dividend is declared in a particular income year. The preference shareholders are also entitled to a return of capital (to the extent of the paid-up amount of the preference shares) in the event of winding up, but otherwise, are not entitled to any further distribution of income and/or capital. At incorporation a number of ordinary shares were allotted to the original shareholders. The ordinary shares were transferred to person X before 1985. The preference shares were issued to the spouse of person X before 1985. After 1985, the preference shares held by the spouse of person X were transferred into the joint names of the spouse of person X and person X. The company acquired real property before 1985. Person X and the spouse of person X were (and still are) husband and wife throughout the periods mentioned above.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 149-30 | Income Tax Assessment Act 1997 section 149-10 | Income Tax Assessment Act 1997 section 149-15 | Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1936 former section 160ZZS | Income Tax Assessment Act 1936 former subsection 160ZZS(1) | Income Tax Assessment Act 1936 former subsection 160ZZRR(1)

Reasons for decision: Summary: A CGT asset is a pre-CGT asset if it was last acquired before 20 September 1985, and no income tax provision has operated to treat it as having been acquired after that date. Division 149 of the ITAA 1997 contains provisions which govern when an asset held by an entity stops being a pre-CGT asset and is treated as having been acquired after that date. Entities affected by Division 149 of the ITAA 1997 are principally companies and trusts (a non-public entity) and public entities. Section 149-10 of the ITAA 1997 defines what a pre-CGT asset is in relation to Division 149 of the ITAA 1997 as follows:- A CGT asset that an entity owns is a pre-CGT asset if, and only if: (a) the entity last acquired the asset before 20 September 1985; and (b) the entity was not, immediately before the start of the 1998-99 income year, taken under: (i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 ; or (ii) Subdivision C of Division 20 of former Part IIIA of that Act; to have acquired the asset on or after 20 Setepmber 1985; and (c) the asset has not stopped being a pre-CGT asset of the entity because of this Division. Each condition will be examined to determine if the CGT asset is a pre-CGT asset. (a) the entity last acquired the asset before 20 September 1985 The entity in this case is the company and the entity purchased the property before 1985. The entity continues to hold the asset and therefore this condition is satisfied. (b) the entity was not, immediately before the start of the 1998-99 income year, taken under: (i) former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 ; or (ii) Subdivision C of Division 20 of former Part IIIA of that Act; to have acquired the asset on or after 20 Setepmber 1985; and Former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA 1936) states as follows: For the purposes of the application of this Part in relation to a taxpayer, an asset acquired by the taxpayer on or before 19 September 1985 shall be deemed to have been acquired by the taxpayer after that date unless the Commissioner is satisfied, or considers it reasonable to assume, that, at all times after that date when the asset was held by the taxpayer, majority underlying interests in the asset were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the asset. Taxation Ruling IT 2340 provides guidance on the administration of former section 160ZZS of the ITAA 1936. In order for an asset not to be deemed to have been acquired after 19 September 1985 due to the operation of former subsection 160ZZS(1) of the ITAA 1936, the Commissioner must be satisfied, or consider it reasonable to assume, that the majority underlying interests in the asset have not changed during the period 19 September 1985 to 30 June 1998. The asset in question, the real estate property was held by the company during all of the relevant period. Underlying interest and majority underlying interest The terms underlying interests and majority underlying interests are defined in section 149-15 of the ITAA 1997 (former subsection 160ZZRR(1) of the ITAA 1936 for the purposes of Division 20 of the ITAA 1936) as follows: underlying interest, in relation to an asset, means a beneficial interest that a natural person holds (whether directly or indirectly) in the asset or in any income of that may be derived from the asset. majority underlying interests, in relation to an asset, means more than one-half of: (a) the beneficial interests that natural persons hold (whether directly or indirectly) in the asset; and (b) the beneficial interests that natural persons hold (whether directly or indirectly) in any income that may be derived from the asset. 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 any ordinary income that may be derived from the asset. An ultimate owner is: (a) an individual (b) a company whose constitution prevents it from making any distribution, whether in money, property or otherwise, to its members (c) the Commonwealth, a State or a Territory (d) a municipal corporation (e) a local governing body; or (f) the government of a foreign country, or of part of a foreign country. 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. 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. Paragraph 10 of IT 2530 discusses if the persons who immediately before 20 September 1985 held more than one half of the underlying interests in an asset continue to hold more than one half of the underlying interests at all times on and after that date, there will be no change in the majority underlying interests in the asset. In these circumstances a change in the proportions in which the persons held interests in the asset would not have a bearing. The following example illustrates this point: Immediately before 20 September 1985 underlying interests in an asset of a company were owned by four individuals in the following proportions - A - 90% B - 5% C - 3% D - 2%. Following a change in the shareholding of the company after 20 September 1985, the underlying interests in the asset were owned by the individuals in the following proportions - A - 1% B - 2% C - 48% D - 0% E - 49%. The individuals who owned underlying interests both immediately before 20 September 1985 and after the change in ownership were A, B and C. Immediately before 20 September 1985 A, B and C between them owned more than one half of the underlying interests (that is, 98%). After the change A, B and C between them still owned more than one half of the underlying interests (that is, 51%). Accordingly, more than one half of the underlying interests in the company's asset continued to be held by the same persons. Section 149-30 would therefore not apply to deem the asset acquired by the company before 20 September 1985 to have been acquired on or after that date. In your case both person X and the spouse of person X together owned more than one half of the underlying interests in the company immediately before 20 September 1985 (that is, the spouse of person X held the preference shares and person X held the ordinary shares). After 1985 there was a change in the ownership of the preference shares, however, after this change the spouse of person X and person X between them still owned more than one half of the underlying interests in the company. This condition is satisfied. (c) the asset has not stopped being a pre-CGT asset of the entity because of this Division. Section 149-30 of the ITAA 1997 provides that an asset stops being a pre-CGT asset when the majority underlying interests in the asset stop being held by the pre 20 September 1985 owners. The provision will not be triggered where the Commissioner is satisfied, or thinks it reasonable to assume, that at all times from 19 September 1985, the majority underlying interests in the assets have not changed. This has the same meaning as former section 160ZZS of the ITAA 1936 which has been addressed above. There have been no further changes to the shareholdings of the company since the change in the ownership of the preference shares. This condition is satisfied. | Detailed Reasoning - Conclusion: Therefore, the property owned by the company that was acquired before 1985 did not become a post-CGT asset when shares were transferred to joint names and as there have been no further changes to the shareholding the asset will still hold the pre-CGT status.

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. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.