Private ruling: Division 7A - continuity of ownership
Published: November 2013
Ruling period: 1 July 2010 to 30 June 2012

Ruling: Q1: Has the transfer of shares of the company by the executors of a deceased estate to the beneficiary of the estate caused the company to fail the continuity in ownership test under section 109CA(7)(d) of the Income Tax Assessment Act 1936 ? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The deceased was sole shareholder of various entities with a varied asset base. The deceased passed away and consequently the executors of the Estate of the deceased became sole shareholders of all entities. The company was incorporated and assets were rolled over into the new company under section 124G of the Income Tax Assessment Act 1997 (ITAA 1997). The sole legal shareholders of the company at incorporation were the executors of the estate of the deceased. Under the Last Will and Testament of the deceased the beneficiary of the Will is the taxpayer; provided they live to be 25 years of age. In the event the taxpayer passed away prior to reaching 25 years of age the deceased's siblings are the nominated beneficiaries under the Will. The deceased estate is not a discretionary trust; the executors were obliged to hold the Estate's assets and income on trust solely for the taxpayer whilst alive. The shares are not held for the benefit of the trust or the executors but for the benefit of the estate's beneficiary, being the taxpayer whilst they live to the age of 25 years. Prior to 1 July 2009 the company acquired a dwelling under the section 124G rollover. As at 1 July 2009 the taxpayer as beneficial owner of all shares, under the constitution of the company, held; · 100% voting power; · 100% rights to dividends; and · 100% of rights to capital distributions The company is planning to provide this dwelling to the taxpayer as the company's current shareholder and director for private use into the foreseeable future. All of the issued ordinary shares of the company were transferred from the deceased estate to the taxpayer personally, following their X Birthday. As a result of the taxpayer's X Birthday and as per the last Will and testament of the deceased; there was a change in legal ownership of the title to all ordinary shares in the company when they were transferred from the executors to the deceased estate to the taxpayer. Currently there are 'A' class shares owned by the executors of the estate. As the taxpayer has lived to the age of X years and is now the sole beneficiary under the last Will and testament of the deceased they are also the beneficial owner of the 'A' Class shares. Under the constitution of the company this entitles the taxpayer to; · 100% voting power; · 100% rights to dividends; and · 100% of rights to capital distributions The current structure of the company is expected to remain through to the date of payment as defined by subsection 109CA(2) of the Income Tax Assessment Act 1936 (ITAA 1936).

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 109CA(2) | Income Tax Assessment Act 1936 subsection 109CA(7) | Income Tax Assessment Act 1997 subsection 165-12(2) | Income Tax Assessment Act 1997 subsection 165-12(3) | Income Tax Assessment Act 1997 subsection 165-12(4) Anti-avoidance rules | 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 considered the application of Part IVA to the arrangement you asked us to rule on.

Reasons for decision: Summary: Under subsection 109CA(7) of the Income Tax Assessment Act 1936 (ITAA 1936) Subsection (1) does not apply to the provision of a dwelling, if: (a) the dwelling is the main residence of the entity; and (b) the provider of the dwelling is a private company; and (c) the private company acquired the dwelling before 1 July 2009; and (d) the private company would meet the conditions in section 165-12 of the Income Tax Assessment Act 1997 (which is about the company maintaining the same owners) if, despite subsection 165-12(1), the ownership test period were the period: (i) starting on the start of 1 July 2009; and (ii) ending at the time of payment, worked out under subsection (2) of this section. Under subsection 109CA(2) of the ITAA 1936; The time the payment is made is the time the entity first: (a) uses the asset with the permission of the provider of the asset; or (b) has a right to use the asset (whether alone or together with other entities), at a time when the provider of the asset does not have a right: (i) to use the asset; or (ii) to provide the asset for use by another entity. According to subsections 165-12(2) to (4) of the ITAA 1997, in order to meet the Continuity of Ownership Test, at all times during the ownership test period there must be persons who had: · more than 50% of the voting power in the company · rights to more than 50% of the company's dividends, and · rights to more than 50% of the company's capital distributions. Under section 165-205 of the ITAA 1997; Death of beneficial owner and the tests for finding out whether the company has maintained the same owners; states the following; For the purposes of a test, after a person dies, shares that the person owned beneficially at the time of death are taken to continue to be owned beneficially by the person so long as: (a) they are owned by the trustee of the person's estate; or (b) they are owned beneficially by someone who received them as a beneficiary of the estate. | Detailed Reasoning - Application to your circumstances: The taxpayer is the sole beneficiary of the deceased's estate provided they lived to be X years of age. At all times, as per the deceased's Will the executors held the estate's assets for the benefit of the taxpayer. Under the deceased's Will the deceased's siblings hold an equity interest in the estate, not a legal or beneficial interest, unless the taxpayer did not live to be X years of age the siblings can not realize their claim as beneficiaries. The taxpayer has reached the age of X, crystallizing their interest in the estate and the shares have been transferred to them as stipulated under the deceased's Will. Consequently; section 165-205 of the ITAA 1997 has been satisfied. As per the deceased's Will the taxpayer had beneficial ownership of the shares in the company giving them more than 50% voting power in the company, right to more than 50% of the company's dividends and rights to more than 50% of the company's capital distributions. The ordinary shares in the company were transferred to the taxpayer; giving them more than 50% voting power in the company, right to more than 50% of the company's dividends and rights to more than 50% of the company's capital distributions. Accordingly; as the taxpayer was the beneficial owner of the shares and became the legal owner of the shares and section 165-12(2) to (4) of the ITAA 1997 has been satisfied. Prior to 1 July 2009 the company acquired a dwelling and as already established, the company has maintained the same owner. Therefore, as the company has maintained the same owner throughout the ownership test period subsection 109CA(7)(d) ITAA 1936 has been satisfied.