Private ruling: CGT/shares and units/majority underlying ownership
Date of advice: 25 May 2022
Published: May 2022
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the Commissioner satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before the disposal of the Land, majority underlying interests in the Land were had by ultimate owners who had majority interest in the Land immediately before that day under subsection 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Will the capital gain or capital loss made on the disposal of the Land be disregarded under paragraph 104-10(5)(a) of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: Company Pty Ltd (the company) is a private company which was incorporated in Australia before 20 September 1985. The company had the following shares on issue as at 19 September 1985: Share class Shareholder Paid-up capital Amount unpaid 1 x 'A' class share Person A $1 NIL 1 x 'B' class share Person B $1 NIL 1 x 'C' class share Person C $1 NIL 10,000 x 'E' class shares Person D $1,000 $9,000 20,000 x 'F' class shares The Trustee of the Person B Family Trust $20,000 NIL The Memorandum of Association of the company (the Constitution) provides that the holder of the 'A' class share is entitled to the 'Governing Directors Rights' which includes a vote equal to three times the total votes which can be cast by all other shareholders at a general meeting. All other shareholders are entitled to one vote per share. The constitution provides that upon the death of Person A or the cessation of them holding the 'A' class share the Governing Director's Rights transfer to Person B and the 'A' class share converts into a 'D' class share. The constitution provides that upon the death of Person B and Person C (or the cessation of them holding their shares) their 'B' class and 'C' class shares, respectively, will convert to 'D' class shares. The 'D' class shares are redeemable at the company's discretion at their par value. They confer the holder to preferential liquidation up to the paid-up capital upon wind-up, but do not entitle the holder to enjoy in the surplus capital. The 'D' class shares also confer an entitlement to a fixed cumulative preferential dividend of 7% per annum on the paid-up capital of the shares. All other shares issued under the constitution are ordinary shares. The constitution permits the company to pay dividends to any of the holders of a particular class at the exclusion of others. After 20 September 1985, each of the 'A' 'B' and 'C' class shares had been converted into 'D' class shares and are currently held by XXXX. The 10,000 'E' class shares were transferred by Person D to Person E in the 2000-01 income year. XXXX's current shares on issue: Share class Shareholder Income year acquired Paid-up capital Amount unpaid 1 x 'D' class share Person E 1999-00 $1 NIL 1 x 'D' class share Person E 1999-00 $1 NIL 1 x 'D' class share Person E 2000-01 $1 NIL 10,000 x 'E' class shares Person E 2000-01 $1,000 $9,000 20,000 x 'F' class shares The Trustee of the Person B Family Trust 1975-76 $20,000 NIL The company acquired land (the land) shortly after its incorporation before 20 September 1985. Person E and Person F are directors of the company. In July 2021, the company entered into a contract for the sale of the Land with a third-party purchaser. The sale settled during the 20XX-XX income year. The Person B Family Trust The Person B Family Trust (the family trust) was created by a Deed of Settlement before 20 September 1985 between Person A as Settlor and Person B and Person C as trustees. Trustee Company Pty Ltd was incorporated in 1989 and became Trustee of the family trust upon execution of a Deed of Appointment. Person A is the parent of Person B. Person B and Person C are married. Person D and Person E are the children of Person B and Person C. Person E and Person F are married. The trust Deed provides that the primary beneficiaries of the family trust are the children of the marriage of Person B and Person C. The trust Deed also provides that the general beneficiaries of the family trust are the children (and remoter issue) of the primary beneficiaries, the spouses by marriage by any such persons, the siblings of any of the primary beneficiaries and any trustee of a trust or a company in which the beneficiary has an interest or share. The trust Deed has not been amended to add members of a new family as beneficiaries of the family trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 960-100(2) | Income Tax Assessment Act 1997 subsection 104-10(5) | Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1997 subsection 149-15(1) | Income Tax Assessment Act 1997 subsection 149-30(1) | Income Tax Assessment Act 1997 subsection 149-30(2) | Income Tax Assessment Act 1936 subsection 160ZZS

Reasons for decision: Summary: Section 104-10 of the ITAA 1997 provides that CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. A change in the trustee of a trust does not constitute a change in the entity that is the trustee of a trust (subsection 960-100(2) of the ITAA 1997. This means that CGT event A1 will not happen merely because of a change in the trustee. Subsection 104-10(5) provides that a capital gain or capital loss you make is disregarded if you acquired the asset before 20 September 1985. Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) provides the rules which govern when an asset acquired by a taxpayer before 20 September 1985 is treated as having been acquired after that date for capital gains tax (CGT) purposes. Subsection 149-30(1) of the ITAA 1997 provides that an asset stops being a pre-CGT asset at the earliest time when majority underlying interests in the asset were not had by ultimate owners who had 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 consists 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 income that may be derived from the asset. Subsection 149-30(2) of the ITAA 1997 provides that if the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before a particular time the majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day, subsections (1) and (1A) apply as if that were in fact the case. Where shares in a company are held by a discretionary trust, a beneficiary to the trust could not be said to have a beneficial interest in the income or the assets of the trust, including those shares. A beneficiary would have 'a right to be considered as a potential recipient of benefit by the trustee and a right to have this interest protected by a court of equity' (Gartside v Internal Revenue Commissioners [1968] AC 533). However, paragraphs 5 to 7 of 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 provides guidance in respect of non-fixed family trusts and the application of the former section 160ZZS of the Income Tax Assessment Act 1936 (ITAA 1936), now Division 149 of the ITAA 1997. 5. In relation to what are generally referred to as discretionary trust, i.e., family trusts, the trustee of which have discretionary powers as to the distributions of trust income or property to beneficiaries, in considering the question whether majority underlying interests have been maintained in the assets of the trust it will be relevant to take into account the way in which the discretionary trust powers of the trustee are in fact exercised. 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 of the ITAA 1936 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 subsection 160ZZS(1) of the ITAA 1936, find it reasonable to assume that for all practical purposes the majority underlying interests in the trust asset have not changed. That is consistent with the role of the section to close potential avenues for avoidance of tax in cases where there is a substantial change in underlying ownership of assets and the legislative guidance contained in Subdivision G of Division 3 of Part III of the Act. On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provision of the Act. | Detailed Reasoning - Application to your circumstances: The family trust is a discretionary trust created before 20 September, with the trustee having discretionary power to apply income and capital of the trust to the beneficiaries. The class of beneficiaries set out in the trust deed is defined narrowly and does not permit the distribution of income or capital outside of: • The children (being primary beneficiaries) of Person B and Person C; • The children, remoter issue and spouses of the primary beneficiaries; • Any companies in which any one or more of the abovementioned class of beneficiaries holds shares; and • Any trust which any one or more of the abovementioned class of beneficiaries are beneficiaries. The trust is administered for the sole benefit of members of Person B's family. The trustee of the family trust acquired shares in the company before 20 September 1985, pre-CGT, and the CGT asset in question, the land was acquired by the company pre-CGT. The family trust holds more than 50% of the shares in the company, thereby holding more than 50% indirect interest in the land. Due to the narrow definition of beneficiary under the trust Deed, distributions made outside the family has not been possible since the family trust was created. There has not been any amendment to the trust Deed to add members of a new family as beneficiaries. As such, the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985 and before the disposal of the land, majority underlying interests in the land were had by ultimate owners who had majority interest in the land immediately before that day under subsection 149-30(2) of the ITAA 1997. As the Commissioner is satisfied under subsection 149-30(2) of the ITAA 1997 that the majority underlying interests in the land have been maintained throughout the ownership period prior to its disposal in July 2021, any capital gain or capital loss made on the disposal of the land is disregarded under paragraph 104-10(5)(a) of the ITAA 1997.