Private ruling: Proposed members' voluntary liquidation
Date of advice: 24 January 2023
Published: 13 March 2023
Ruling period: 1 July 20XX to 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: In accordance with Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997), was there any point in time from immediately before 20 September 1985 to the date of this ruling at which the majority underlying interests in the pre-CGT assets of the Company were not held by persons who, immediately before 20 September 1985, held the majority underlying interests in those assets? | A1: No | Q2: Will a liquidator's distribution sourced from the Company's Pre-CGT Capital Profits Reserve be considered a dividend under section 47 of the Income Tax Assessment Act 1936 (ITAA 1936) such that it is assessable to the Company's shareholders under section 44 of the ITAA 1936? | A2: No | Q3: Will CGT event C2 in section 104-25 of the ITAA 1997 apply to the liquidator's distribution on cancellation of the Company's shares where the Company ceases to exist within 18 months of the payment? | A3: Yes

Relevant facts and circumstances: The subsidiary company The subsidiary company was an Australian private company incorporated pre capital gains tax. The subsidiary company was a private company, and its shares were not listed on any stock exchange. The subsidiary company was an Australian resident taxpayer. The subsidiary company's primary asset was a commercial property (the Property) which it acquired prior to 20 September 1985 (pre capital gains tax). The Property was acquired as a capital investment and has always been rented out on an arm's length basis. The contract for sale of the Property was executed on XXX and Settlement of the Property was affected on XXX. As the Property was acquired prior to 20 September 1985 (pre-CGT), the gain on sale of $XXX was credited to Equity in the Financial Statements as a Pre-CGT Capital profit reserve. The subsidiary company's Pre-CGT Capital profit reserve balance was maintained until it was placed into Members' Voluntary Liquidation (MVL) by way of member's resolution on XXX. On XXX, the subsidiary company's liquidator declared a first and final dividend of $XXX which included the distribution of the Pre-CGT Capital profit reserve. The first and final liquidator's dividend was set-off against a loan owing by its shareholder to the subsidiary company for funds already advanced. The distribution sourced from the Pre-CGT Capital profit reserve of $XXX was debited against that account. The net distribution of $XXX was recorded as a credit to the shareholder company's Pre-CGT Capital Profits Reserve account. The subsidiary company was deregistered on XXX. Since the subsidiary company's incorporation, and at all times prior to its deregistration, the sole shareholder of the subsidiary company has been the Company. The subsidiary company's shares have always been held by the Company both legally and beneficially, and there has never been any direct changes to the ownership of these shares. The Company The Company is an Australian proprietary company incorporated pre capital gains tax. The Company is an Australian resident taxpayer. The Company is a private company, and its shares are not listed on any stock exchange. The Company is controlled by, and operated for the benefit of, the family. The ultimate ownership of the Company has always been controlled by members of the family. The Company has always been limited by XXX shares of various classes. You have advised that there is no distinction between the various share classes on issue in the Company such that all share classes are entitled to equal rights to dividends, rights to capital distributions and voting rights (and that this has always been the case since the Company's incorporation). Changes to Company shareholdings Since immediately before 20 September 1985, when the capital gains tax provisions were introduced, you have instructed that the ownership of the Company's shares has changed as follows: The legal title of the share held by the advisor as nominee for Child A, was transferred to Child A on XXX. The legal title of the share, held by the advisor as nominee for Child B, was transferred to Child B on XXX. On XXX, Individual A passed away and their shares in the Company were transferred to Individual B in accordance with their will. The shares became post CGT shares. On XXX, Individual B passed away and their shares, including the inherited shares from Individual A, were transferred to Child A and Child B to be held jointly in accordance with the terms of their will. The shares became post CGT shares. There have been no other changes to the Company's shareholdings (other than the changes outlined above), including no changes to the number of shares on issue, rights attached to shares, identity of the share owners or the number of total shareholders. There will be no changes to the Company's shareholdings prior to the proposed Members' Voluntary Liquidation. The Unit Trust also holds shares in the Company. The Unit Trust was established by Trust Deed pre capital gains tax. The Unit Trust is an Australian resident unit trust. The units in the Unit Trust are currently held by Child A and Child B, who currently hold 50% each of the total units on issue in the Unit Trust. Child A and Child B have continuously held the legal and beneficial ownership of their respective units since before 20 September 1985. The Unit Trust has the ability to distribute both the income of the trust and the capital of the trust to its unit-holders. There have been no changes to the unit-holdings of the Unit Trust since 20 September 1985. There will be no changes to the unit-holdings of the Unit Trust prior to the proposed Members' Voluntary Liquidation. There has not been an amendment to the Trust Deed that causes a practical effect of a change to the underlying interests in the trust assets and there will be no amendments to the Trust Deed of this nature prior to the proposed Members' Voluntary Liquidation. Proposed Member's Voluntary Liquidation It is proposed to have the Company placed into Member's Voluntary Liquidation (MVL) by way of member's resolution in the income year ended 30 June 20XX. The liquidator will separately identify and pay the amount of the Company's Pre-CGT Capital Profits Reserve to the current shareholders. The distribution sourced from the Pre-CGT Capital profit reserve will be debited against this account. The statement of distribution from the liquidator will make it clear as to the quantum that each shareholder has received that has been appropriated from the Pre-CGT Capital Profits Reserve account. The Company's governing documents allow the Company to make distributions to its members. It is proposed that the liquidator will realise its assets and discharge its liabilities and return the resulting cash as a first and final dividend to the Company's members. Pre - CGT Capital Profits Reserve The Company was incorporated pre capital gains tax and accordingly the Company held a number of pre-CGT assets. The disposal of these assets over time has contributed to its Pre-CGT Capital Profits Reserve balance, which is currently $XXX. The Company continuously held 100% of the legal and beneficial ownership of its pre-CGT assets that have, over time, resulted in accretions to its Pre-CGT Capital Profits Reserve account. In the XXX income year the Capital Profits Reserve was credited by $XXX which was sourced from the distribution of the subsidiary company's Pre-CGT Capital Profit Reserve.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 section 44 | Income Tax Assessment Act 1936 subsection 44(1) | Income Tax Assessment Act 1936 section 47 | Income Tax Assessment Act 1936 subsection 47(1A) | Income Tax Assessment Act 1936 former subsection 82KZC(1) of the ITAA 1936 | Income Tax Assessment Act 1936 subdivision C of Division 20 of former Part IIIA | Income Tax Assessment Act 1936 former subsection 160ZZRR(1) | Income Tax Assessment Act 1936 former subsection 160ZZS(1) | Income Tax Assessment Act 1936 former subsection 160ZZS(3) | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subsection 104-25(2) | Income Tax Assessment Act 1997 subsection 104-25(5)(a) | Income Tax Assessment Act 1997 section 108-7 | Income Tax Assessment Act 1997 Division 109 | Income Tax Assessment Act 1997 section 109-10 | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1997 subdivision 149-B | Income Tax Assessment Act 1997 subdivision 149-C | Income Tax Assessment Act 1997 section 149-10 | Income Tax Assessment Act 1997 subsection 149-15(1) | Income Tax Assessment Act 1997 subsection 149-15(2) | Income Tax Assessment Act 1997 subsection 149-15(3) | Income Tax Assessment Act 1997 subsection 149-15(4) | Income Tax Assessment Act 1997 subsection 149-15(5) | Income Tax Assessment Act 1997 section 149-30 | Income Tax Assessment Act 1997 subsection 149-30(1) | Income Tax Assessment Act 1997 subsection 149-30(3) | Income Tax Assessment Act 1997 subsection 149-30(4) | Income Tax Assessment Act 1997 section 149-50

Reasons for decision: Summary: The majority underlying interests in the Company's pre-CGT assets have been maintained by the same persons who held majority underlying interests in those assets immediately before 20 September 1985 and accordingly Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) has not impacted the pre-CGT status of the Company's pre-CGT assets. | Detailed Reasoning - Detailed reasoning: Division 149 of the ITAA 1997 contains provisions which govern when a CGT asset of an entity stops being a pre-CGT asset for the purposes of the capital gains tax provisions. If caught by Division 149, the CGT asset will be treated as having been acquired after 20 September 1985 and will become a post-CGT asset. Division 149 is an anti-avoidance provision aimed at preventing circumvention of the limitation of the tax on capital gains to assets acquired after 19 September 1985. It applies where a taxpayer (for example, a company) has acquired assets prior to 20 September 1985 and on or after that date there is a change of 50 per cent or more in the underlying ownership of the assets (in the case of a company, a change of 50 per cent or more in the beneficial ownership of the company's shares). Where such a change occurs, the provision operates to deem the assets to have been acquired after 19 September 1985 so that any subsequent real capital gain on the assets will fall within the tax base. The ultimate ownership of the pre-CGT assets held directly by the Company (including the pre-CGT shares that the Company held in the subsidiary company) can be traced through to the Company's various shareholders. There have been several changes to the Company shareholdings since 20 September 1985. Accordingly, Division 149 may have applied to the Company's pre-CGT assets, including the subsidiary company's shares, prior to its deregistration. If so, the accretions to the Company's Pre-CGT Capital Profits Reserves, including the accretion in XXX of $XXX following the receipt of the liquidator's distribution from the wind up of the subsidiary company, may be incorrect. Our analysis of the impacts of Division 149 of the ITAA 1997 on the Company's pre-CGT assets is outlined below. | Detailed Reasoning - What is a "pre-CGT asset'?: Section 149-10 of the ITAA 1997 explains what a "pre-CGT asset" is: 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 September 1985; and (c) the asset has not stopped being a pre-CGT asset of the entity because of this Division. Each of these requirements is outlined below. (a) Last acquired before 20 September 1985 The acquisition of a CGT asset, including the ways in which you can acquire an asset and the time of acquisition, is governed by Division 109 of the ITAA 1997. Item 2 in the table in section 109-10 of the ITAA 1997 says that when a company issues or allots equity interests in the company to you are taken to have acquired those interests when the contract is entered into or, if none, when the equity interests are issued or allotted to you. The Company acquired its shares in the subsidiary company when the subsidiary company was incorporated pre-CGT. The Company has continuously held the subsidiary company shares since prior to 20 September 1985 up until the subsidiary company's deregistration. Accordingly, the Company last acquired the shares in the subsidiary company before 20 September 1985 and paragraph (a) in section 149-10 of the ITAA 1997 is satisfied. (b) Transitional rules: 20 September 1985 to the end of the 1998 income year Paragraph (b) of section 149-10 of the ITAA 1997 requires that immediately before the start of the 1998-99 income year, the Company was not taken under former subsection 160ZZS(1) of the ITAA 1936 or Subdivision C of Division 20 of former Part IIIA of the ITAA 1936 to have acquired the asset on or after 20 September 1985 (being the provisions that applied prior to the rewrite of the ITAA 1936 into the ITAA 1997). Former subsection 160ZZS(1) of the ITAA 1936 is the equivalent provision of now Subdivision 149-B, which are the rules that apply to non-public entities. Former Subdivision C of Division 20 of former Part IIIA of the ITAA 1936 is the equivalent provision of the now Subdivision 149-C, which includes the requirements for public entities. The Company is not a public company and accordingly only former subsection 160ZZS(1) of the ITAA 1936 would have been applicable. Former subsection 160ZZS(1) of the ITAA 1936 applied to pre-CGT assets held between 20 September 1985 and the end of the 1998 income year as follows: 160ZZS(1) Deemed acquisition after 19 September 1985 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. Up until 19 January 1997, former subsection 160ZZS(3) of the ITAA 1936 defined majority underlying interests when applying 160ZZS(1) as having the same meaning as in Subdivision 3G of Part III. Majority underlying interests in relation to property was defined in former subsection 82KZC(1) of the ITAA 1936 to mean more than one-half of: (a) The beneficial interests that natural persons hold (whether directly or through one or more interposed companies, partnerships or trusts) in the property, and (b) The beneficial interests held by natural persons (whether directly or through one or more interposed companies, partnerships or trusts) in any income that may be derived from the property. From 20 January 1997 onwards, majority underlying interests was defined in former subsection 160ZZRR(1) of the ITAA 1936 to mean in relation to an asset, 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 held by natural persons (whether directly or indirectly) in any income that may be derived from the asset. Immediately before 20 September 1985, until the end of the 1998 income year, the Company continuously held the direct legal and beneficial ownership of its pre-CGT assets, including 100% of the subsidiary company's shareholdings. There were no changes to the Company's direct ownership of the pre-CGT subsidiary company's shares or the direct ownership of the Company's other pre-CGT assets. However, the Company is a company and not a natural person and so a tracing exercise to the Company's shareholders is required. Immediately before 20 September 1985, until the end of the 19XX income year, Individual A (a natural person) continuously held their XXX shares. It was advised that there is no distinction between share classes such that all share classes are entitled to equal rights to dividends, rights to capital distributions and voting rights. Accordingly, Individual A's shareholdings can be expressed as XXX% of the total ownership interests in the Company. Immediately before 20 September 1985, until the end of the 19XX income year, Individual B (a natural person) continuously held their XXX shares, equating to XXX% of the total ownership interests in the Company. Combined, Individual A and Individual B held XXX% of the Company shareholding (i.e. they held the majority underlying interests), which remained unchanged from immediately before 20 September 1985, until the end of the 19XX income year. For completeness, we note that the only changes to the Company's shareholding between 20 September 1985 and the end of the 19XX income year were: There were no other changes to the Company's shareholdings, legal or beneficial, during the period. Accordingly, the Commissioner is satisfied that the majority underlying interests in the Company's pre-CGT assets have been maintained up until the end of the 19XX income year by the same persons who held majority underlying interests in those assets immediately before 20 September 1985. As a result, former subsection 160ZZS(1) of the ITAA 1936 has not impacted the pre-CGT status of the Company's pre-CGT assets. Paragraph (b) of section 149-10 of the ITAA 1997 is satisfied. (a) Subdivision 149-B Paragraph (c) of section 149-10 of the ITAA 1997 requires an assessment to be made under Division 149 of the ITAA 1997 as to whether the provisions will impact upon the pre-CGT status of an entity's pre-CGT assets. As outlined further above, Subdivision 149-B of the ITAA 1997 are the relevant provisions that apply to non-public entities (whereas Subdivision 149-C of the ITAA 1997 applies to public entities). The Company is not a public company and is not a public entity within the meaning as listed in section 149-50 of the ITAA 1997. Accordingly, Subdivision 149-B of the ITAA 1997, starting at section 149-30, are the relevant provisions to consider and these are outlined below. | Detailed Reasoning - The Factual Test: There are two methods that can be used to determine whether an asset continues to qualify as a pre-CGT asset under Division 149: the Factual Test or the Commissioner's Discretion. Under the Factual Test in subsection 149-30(1) of the ITAA 1997: The 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. | Detailed Reasoning - Ultimate owners: Subsection 149-15(3) of the ITAA 1997 relevantly defines an 'ultimate owner' to include an individual. It does not include companies that can make distributions to its members, and it does not include trusts. Ultimate owners would include Individual A, Individual B, Child A and Child B. The Company can make distributions to its members and accordingly the Company is not an 'ultimate owner' for the purposes of subsection 149-30(1) of the ITAA 1997. | Detailed Reasoning - Majority underlying interests: Subsection 149-15(1) of the ITAA 1997 defines majority underlying interests as follows: Majority underlying interests in a CGT asset consist of: (a) more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and (b) 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. This means that ultimate owners must have beneficial interests in both the underlying pre-CGT asset and any ordinary income that may be derived from that underlying pre-CGT asset. The Company is the direct owner of its pre-CGT assets and holds the beneficial ownership of its pre-CGT assets and any ordinary income derived from those assets. However, the Company is not an ultimate owner and accordingly we must continue to trace the beneficial ownership of the Company's pre-CGT assets through to the indirect owners of these assets. Indirect beneficial interests are defined by subsections 149-15(4) and 149-15(5) of the ITAA 1997 as follows: 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. The Company's governing documents allow the Company to distribute both dividends and capital. There is no distinction between shares classes such that all share classes are entitled to equal rights to dividends, rights to capital distributions. Immediately prior to 20 September 1985, Individual A and Individual B held majority underlying interests, as ultimate owners, in the Company and the Company's pre-CGT assets, holding XXX% and XXX% (a combined XXX% of the ownership interests held in the Company). Together Individual A and Individual B were entitled to XXX% of any distribution of capital or dividend that the Company made. However, Individual A and Individual B's combined XXX% shareholding was not continuously maintained. | Detailed Reasoning - Standing in the shoes of former owner on death: There are special rules that apply to the Factual Test in the case of death. The changes to Individual A and Individual B's combined XXX% shareholding occurred on their passing as follows: While Child A and Child B's shares are jointly held, Child A and Child B are treated as though they each owned 50% of the shares in the Company, in accordance with section 108-7 of the ITAA 1997. Subsection 149-30(3) of the ITAA 1997 provides: Subsection (4) affects how the majority underlying interests in the asset are worked out if an ultimate owner (the new owner) has acquired a percentage (the acquired percentage) of the underlying interests in the asset because of an event described in column 2 of an item in the table. The former owner is the entity described in column 3 of that item. | Detailed Reasoning - The former owner is:: 1 CGT event A1 or B1 if there is a roll-over under Subdivision 126-A (about marriage or relationship breakdowns) for the event the entity that, immediately before the event happened, owned the CGT asset to which the event relates ... 2 the death of a person that person Subsection 149-30(4) of the ITAA 1997 provides: This section applies as if the new owner had (in addition to any other underlying interests), at any time when the former owner had a percentage (the former owner's percentage) of the underlying interests in the asset, a percentage of the underlying interests in the asset equal to the acquired percentage, or the former owner's percentage at that time, whichever is the less. Special rules apply to work out majority underlying interests in an asset if an ultimate owner acquired an underlying interest in it because of the death of the former owner. Subsection 149-15(2) of the ITAA 1997 defines an 'underlying interest' in a CGT asset as a beneficial interest that an ultimate owner has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset. The combined effect of subsections 149-30(3) and 149-30(4) of the ITAA 1997 is that the new owner of the underlying interest in the asset is, in broad terms, taken to stand in the shoes of the former owner. In essence there is no change in majority underlying interests in an asset from this event. Applying these provisions to our current circumstances: As a result of subsections 149-30(3) and 149-30(4) of the ITAA 1997, Child A and Child B are deemed to have continuously held the inherited shares, a combined XXX% majority shareholding, since immediately prior to 20 September 1985. | Detailed Reasoning - Conclusion: For the purposes of the Factual Test in subsection 149-30(1) of the ITAA 1997, majority underlying interests in the Company's pre-CGT assets have been maintained and Division 149 has not affected the pre-CGT status of the Company's assets. | Detailed Reasoning - The Unit Trust: For completeness we have also considered the impact of Division 149 on the Unit Trust. Child A and Child B acquired their units in the Unit Trust prior to 20 September 1985. There have been no changes to the unit-holdings of the Unit Trust since Child A and Child B acquired their units in the Unit Trust. Accordingly, the Commissioner would consider it reasonable to assume that the majority underlying interests in the Unit Trust's assets have not changed since immediately prior to 20 September 1985, and Division 149 has not affected the pre-CGT status of the Unit Trust's assets. | Summary: A liquidator's distribution sourced from the Company's Pre-CGT Capital Profits Reserve will not be considered a dividend under section 47 of theITAA 1936. As such, the liquidator's distribution will not be assessable to the Company's shareholders under section 44 of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Subsection 44(1) of the ITAA 1936 includes in a shareholder's assessable income any dividends paid to the shareholder out of profits derived by the company from any source (if a resident of Australia) and from an Australian source (if a non-resident). The term dividend in subsection 6(1) of the ITAA 1936 includes any distribution made by a company to any of its shareholders. However, paragraph (d) of the definition of dividend of subsection 6(1) of the ITAA 1936 excludes a distribution from the meaning of dividend if the amount of a distribution is debited against an amount standing to the credit of the company's share capital account. Distributions to shareholders of a company by a liquidator in the course of winding up the company are, at first instance, not considered to be distribution out of profits of the company. At common law, a distribution to a shareholder by a liquidator is capital in the hands of the shareholder since it is a realisation of the shareholder's interest in the company: FC of T (NSW) v Stevenson (1937) 4 ATD 415; (1937) 59 CLR 80; FC of T v Blakely (1951) 9 ATD 239 at 245, 247; (1951) 82 CLR 388 at 402, 407; FC of T v Brewing Investments Ltd [2000] FCA 920; 2000 ATC 4431 per Hill J at 18 - 19 . This is supported by the inclusion of Section 47 of the ITAA 1936, which governs liquidator's distributions that would otherwise fall out of the ambit of Section 44. Section 47 of the ITAA 1936 specifically deems certain amounts to be dividends paid to the shareholders out of the profits derived by the company. Subsection 47(1) of the ITAA 1936 provides: Distributions by liquidator Distributions to shareholders of a company by a liquidator in the course of winding up the company, to the extent to which they represent income derived by the company (whether before or during liquidation) other than income which has been properly applied to replace a loss of paid-up share capital, shall, for the purposes of this Act, be deemed to be dividends paid to the shareholders by the company out of profits derived by it. Subsection 47(1A) of the ITAA 1936 explains the phrase 'income derived by the company' as follows: (a) an amount (except a net capital gain) included in the company's assessable income for a year of income; or (b) a net capital gain that would be included in the company's assessable income for a year of income if the Income Tax Assessment Act 1997 applied. The effect of subsection 47(1A) of the ITAA 1936 is that a dividend paid to a shareholder that represents company profit will be taxed in the hands of the shareholder in the same manner in which that profit was taxed in the hands of the company. For example, the distribution of a non-taxable capital gain made by the company to a shareholder would be non-taxable to the shareholder. The interpretation of subsection 47(1A) of the ITAA 1936 is predicated on the ability of the liquidator to attribute a portion of a distribution as having been sourced from that non-taxable capital gain. Taxation Determination 95/10 Income tax: what is the significance of the Archer Brothers principle in the context of liquidation distributions? (TD 95/10) explains the Commissioner's view on that same ability in the context of liquidation distributions under the Archer Brothers principle. The Archer Brothers principle is if a liquidator appropriates a particular fund of profit or income in making a distribution, that appropriation ordinarily determines the character of the distributed amount for the purposes of section 47 and other provisions of the Act. TD 95/10 provides the Commissioner will accept that a liquidator may rely on the Archer Brothers principle if: (i) a specific provision in the Act does not produce a different result; (ii) the company accounts have been kept so that a liquidator can clearly identify a specific profit or fund in making a distribution; and (iii) it is clear from either the accounts or statement of distribution that the liquidator has appropriated the specific profit or fund in making the distribution. In this case, the Company has kept accounts that clearly identify its pre-CGT profits, as these have been separately accounted for in the company's equity accounts under its Pre-CGT Capital Profits Reserve. Accordingly, a liquidator would clearly be able to identify the non-taxable capital gains in the making of its distribution. The liquidator's distribution that is sourced from non-taxable capital gains will be debited against the Pre-CGT Capital Profits Reserve. Finally, in making a first and final liquidator's distribution, the statement of distribution from the liquidator will make it clear as to the quantum that each shareholder has received that has been appropriated from the Pre-CGT Capital Profits Reserve account. It is accepted that the capital distribution proposed to be made by the liquidator will be made in accordance with the Archer Bros Principle. Therefore, the distribution of the Pre-CGT Capital Profits Reserve will not be considered a dividend under subsection 47(1) of the ITAA 1936. The distribution will be the distribution of a capital profit associated with the disposal of assets acquired by the company prior to 20 September 1985. | Summary: CGT event C2 in section 104-25 of the ITAA 1997 will apply to the liquidator's distribution on cancellation of the Company's shares where the Company ceases to exist within 18 months of the payment. | Detailed Reasoning - Detailed reasoning: Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled (b) being released, discharged or satisfied (c) expiring; or (d) being abandoned, surrendered or forfeited; or ... The time of the event is when you enter into the contract that results in the asset ending or if there is no contract, when the asset ends per subsection 104-25(2) of the ITAA 1997. The Commissioner's view on the treatment of liquidator's distributions for capital gains tax purposes is outlined in Taxation Determination 2001/27 Income tax: capital gains: how do Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 ('ITAA 1997') treat: (a) a final liquidation distribution, including where all or part of it is deemed by subsection 47(1) of the Income Tax Assessment Act 1936 ('ITAA 1936') to be a dividend; and (b) an interim liquidation distribution to the extent it is not deemed to be a dividend by subsection 47(1)? (TD 2001/27) TD 2001/27 explains that the full amount of a distribution made by a liquidator on the winding-up of a company constitutes capital proceeds from the ending of the shareholder's shares in the company. Where the company is wound up within 18 months of the distribution, the relevant CGT event for the company's shareholders will be CGT event C2 in section 104-25 of the ITAA 1997. The anti-overlap provision in section 118-20 of the ITAA 1997 reduces any capital gain by amounts that are otherwise assessable as a result of the event. Accordingly, any component of the liquidator's distribution that would be a dividend under subsection 47(1) of the ITAA 1936 will reduce the capital gain, as the amount will be otherwise assessable as a dividend under section 44 of the ITAA 1936. The Company will be wound up within 18 months of the liquidator's distribution. Accordingly, CGT event C2 will be triggered for the Company's shareholders and the liquidator's distribution will be included in the proceeds to work out any capital gain or loss from the event. As the portion of the liquidator's distribution that has been appropriated from the Pre-CGT Capital Profits Reserve is not an assessable dividend under subsection 47(1) of the ITAA 1936, the anti-overlap provision will not apply to this component. The assessable capital gain or loss will be the difference between the capital proceeds from the liquidator distribution and the cost base of the shares. Where the Company's shareholders hold pre-CGT shares in the company, any capital gain made under CGT event C2 will be disregarded under the exception of that event in subsection 104-25(5)(a) of the ITAA 1997. The Company's post-CGT shareholders must calculate any capital gain or loss under CGT event C2 having regard to their respective cost bases of their shares.

It is proposed that the Company is to be placed into Members' Voluntary Liquidation (MVL) by way of member's resolution in the income year ended 30 June 20XX. The Company is seeking confirmation of the income tax treatment of future liquidator's distributions where they are sourced from the Company's Pre-CGT Capital Profits Reserve. | The legal title of the share held by the advisor as nominee for Child A (the beneficial owner), was transferred to Child A on XXX. However, Child A acquired the beneficial interest in the share before 20 September 1985 and despite the transfer of the legal title, Child A maintained the beneficial interest in the share. Child A's share equates to XXX% of the total ownership interests in the Company. | The legal title of the share held by the advisor as nominee for Child B (the beneficial owner), was transferred to Child B on XXX. However, Child B acquired the beneficial interest in the share before 20 September 1985 and despite the transfer of the legal title, Child B maintained the beneficial interest in the share. Child B's share equates to XXX% of the total ownership interests in the Company. | Individual A passed away on XXX and their shares formed part of their residuary estate and were transferred to Individual B in accordance with their will. | Individual B passed away on XXX and their shares, as well as the shares inherited from Individual A, formed part of their residuary estate and were transferred to Child A and Child B to be held jointly in accordance with their will. | When Individual B inherited Individual A's shares (equating to XXX%), they were treated as standing in the shoes of Individual A, as though they had owned the shares since immediately prior to 20 September 1985. | When Child A and Child B inherited Individual B's shares (equating to XXX%), they were treated as standing in the shoes of Individual B, as though they had owned the shares since immediately prior to 20 September 1985. | It also then follows that when Child A and Child B inherited the shares from Individual B, they were treated as standing in the shoes of Individual B, who was in turn standing in the shoes of Individual A. Accordingly, Child A and Child B should be treated as though they had owned the twice inherited shares since immediately prior to 20 September 1985.