Private ruling: Capital gains - majority underlying ownership
Date of advice: 8 February 2021
Published: March 2021
Ruling period: Year ending 30 June 2021 | Year ending 30 June 2022 | Year ending 30 June 2023 | Year ending 30 June 2024 | Year ending 30 June 2025 | Year ending 30 June 2026
Date scheme commenced: 1 July 2020

Ruling: Q2: Are majority underlying interests in the Relevant Shares held by a Taxpayer in Company X had by the ultimate owners who had a majority underlying interest in the shares immediately before 20 September 1985 for the purpose of subsection 149-30(1) of the Income Tax Administration Act of 1997 (ITAA 1997)? | A1: Yes | Q3: Is the Commissioner satisfied, or does the Commissioner think it reasonable to assume, that at all times on and after 20 September 1985 and before the present time majority underlying interests in the Relevant Shares were had by the ultimate owners who had majority underlying interest in the Relevant Shares immediately before that day for the purpose of subsection 149-30(3) of the ITAA1997? | A2: Yes | Q4: If the Taxpayer disposes of Relevant Shares in Company X, can any capital gain or capital loss be disregarded under subsection 104-10(5)(a) of the ITAA 1997? | A3: Yes

Relevant facts and circumstances: Discretionary Trusts 1. Each of the taxpayers is a discretionary trust and includes the same beneficiaries 2. Each of the discretionary trusts has a company acting as the trustee and at all times have administered the trusts for the benefit of X. 3. Each of the discretionary trusts is a clone of Trust A with beneficiaries and terms identical to that of Trust A. Company X 4. Company X was incorporated on X to act as trustee for Unit Trust X, and issued tow ordinary shares, one each held by Trust A and Trust B 5. On the XX of XX,XXX, Company A issued X ordinary shares to Trust A and X to Trust B. 6. Trust A acquired X shares from Trust B becoming the sole shareholder 7. On the X of X, XXX Unit Trust X disposed of all of its CGT assets to Company A under a subdivision 124-N roll-over 8. Company A issued X ordinary shares to Trust A (the sole shareholder) in exchange for the units held in Unit Trust X and commenced carrying on the business in its own right. Unit Trust X 9. On the date X, Unit Trust X was established with X ordinary units on issue, X held by Trust A (the majority unit holder) and X held by Trust B and commenced to carry on the business 10. Unit Trust X commenced to carry on the business. 11. On the XX, XX of XXXX, Trust A acquired X ordinary units from Trust B to I crease its ordinary unit holdings 12. Immediately prior to the 20 September 1985, Trust A held X ordinary units in Unit Trust X. Disposal of assets by Unit Trust X to Company X 13. On the X,XX of XXX Unit Trust X disposed of all of its CGT assets to Company X under a subdivision 124-N roll-over 14. Company X issued X ordinary shares to Trust A in exchange for the units held in Unit Trust X. 15. Company X commenced carrying on the business in its own right. 16. On the XX,XX of XXXX, Unit Trust X was vested Cloning of Trust A 17. On the XX,XX of XXXX, Company B, trustee of Trust A commenced to hold the ordinary shares in Company X in its capacity as trustee for a number of discretionary trusts 18. On XX,XX of XXXX, the ordinary shares in Company X were subdivided into XX ordinary shares and apportioned across the discretionary trusts relevant to their holdings 19. Then, on the XX,XX of XXXX, Company X issued new ordinary shares. 20. Legal ownership of the ordinary shares in Company X was transferred upon change of trustees (there was no change of beneficial ownership) from Company B to Company G. 21. There was further change in trustee company for a number of the discretionary trusts on the XX,XX of XXXX but no change of beneficial ownership. Further issues for you to consider The private ruling has been requested for the income years XXXX to XXXX inclusive to encompass the period over which the shares held in Company X may be disposed. The private ruling is subject to there being no event that would cause the Relevant Shares to stop being pre-CGT assets under Division 149 of the ITAA 1997 and CGT event K6 [1] not happening.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 160ZZS(1) | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 subsection 104-10(2)(b) | Income Tax Assessment Act 1997 subsection 104-60(5)(b) | Income Tax Assessment Act 1997 Section 104-230 | Income Tax Assessment Act 1997 Section 112-25 | Income Tax Assessment Act 1997 Subdivision 124-N | Income Tax Assessment Act 1997 S ubsection 124-855(1)(a) | Income Tax Assessment Act 1997 Subsection 124855(1)(b) | Income Tax Assessment Act 1997 Subsection 124-855(2) | Income Tax Assessment Act 1997 Subsection 124-860(1) | Income Tax Assessment Act 1997 Subsection 124-860(2) | Income Tax Assessment Act 1997 Subsection 124-860(4) | Income Tax Assessment Act 1997 Subsection 124-860(5) | Income Tax Assessment Act 1997 Subsection 124-860(6) | Income Tax Assessment Act 1997 Subsection 124-860(7) | Income Tax Assessment Act 1997 Subsection 124-865 . | Income Tax Assessment Act 1997 Subsection 124-875(3) | Income Tax Assessment Act 1997 Division 149 | 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 149-30(1) | Income Tax Assessment Act 1997 Subsection 149-30 (1A) | Income Tax Assessment Act 1997 Subsection 149-30(2) | Income Tax Assessment Act 1997 Subsection 149-30(3)

Reasons for decision: Summary: 1. Immediately before 20 September 1985, Trust A held XX ordinary units in Unit Trust X. 2. In XXXX Unit Trust X and Company X entered into a 124-N rollover in which Trust A received shares in exchange for the units held in Unit Trust X. Under the conditions of the 124-N rollover the shares replacing the units that were issued prior to 20 September 1985 retain their pre-CGT status and are the Relevant Shares. 3. In XXXX, Company B (as trustee for Trust A) held XX ordinary shares in Company X, of which XX ordinary shares (being the Relevant Shares) were acquired prior to 20 September 1985 and Trust A was cloned with Company B as trustee for each of the discretionary trusts. The terms and beneficiaries of each trust was identical to that of Trust A and at all times they have been administered for the benefit of X. 4. As described in paragraphs 5 to 7 of Income Tax ruling IT 2340 the Commissioner would, in terms of sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed. 5. For the purpose of subsection 149-30(1) of the Income Tax Administration Act of 1997 (ITAA 1997), the majority underlying interests in the Relevant Shares held by a Taxpayer in Company X were had by the ultimate owners who had a majority underlying interest in the shares immediately before 20 September 1985. 6. In addition, for the purpose of subsection 149-30(3) of the ITAA 1997, the Commissioner is satisfied, or thinks that it is reasonable to assume, that at all times on and after 20 September 1985 and before the present time, majority underlying interest in the Relevant Shares were had by the ultimate owners who had majority underlying interest in the Relevant shares immediately before 20 September 1985. 7. As the Relevant Shares, being the shares in Company X acquired or deemed to have been acquired by the Taxpayers before 20 September 1985, they have demonstrated the continuity of majority underlying interests for the purposes of Division 149. 8. In the event the Taxpayer disposes of Relevant Shares the capital gain or loss can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997, subject to there being no event that would cause the Relevant Shares to stop being pre-CGT assets under Division 149 of the ITAA 1997 and CGT event K6 [2] not happening. | Detailed Reasoning - Detailed reasoning: The Taxpayers are Discretionary Trusts 9. Each of the taxpayers is a discretionary trust and have the same beneficiaries include: 10. Each discretionary trust has a company acting as the trustee and at all times have administered the trusts for the benefit of the X. 11. Each discretionary trust is a clone of Trust A with the beneficiaries and terms identical to that of Trust A. Disposal of a CGT asset 12. Subsection 104-10 provides that an A1 event occurs if you dispose of a CGT asset including when a change of ownership occurs from you to another entity. 13. However, in the event you stop being the legal owner of the asset but continue to be its beneficial owner, a change of ownership does not occur, such as a change in the trustee of trust. 14. A further exception is provided under paragraph 104-10(5)(a) which states that a capital gain or capital loss you make is disregarded if: you acquired the asset before 20 September 1985 Pre-CGT assets 15. Subsection 149-10 of the ITAA 1997 provides that a CGT asset 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 1998-1999 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 the 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. 16. Section 149 of the ITAA 1997 is the rewritten form of previous subsection 160ZZS(1) of the ITAA 1936 and applies from the start of the 1998/1999 income year with former subsection 160ZZS(1) of the ITAA 1936 applicable to earlier income years. Majority underlying interest 17. Subsection 149-15(1) states that 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. 18. Subsection 149-15(2) states that an underlying interest in a CGT asset is a beneficial interest that an ultimate owner [3] has (whether directly or indirectly) in the asset or in any ordinary income that may be derived from the asset. When a CGT asset stops being a pre-CGT asset 19. Subsections 149-30(1), (1A) and (2) provide the following: (1) 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 [4] . (1A) Also, Part 3-1 and this Part (except this Division) apply to the asset as if the entity had acquired it at that earliest time [5] . (2) 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 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 [6] . Income Tax Ruling IT 2340 20. Income tax ruling IT 2340 is a public ruling of the application of section 160ZZS of the ITAA that considers at paragraphs 5,6 and 7 the application to discretionary trusts as follows: 5. In relation to what are generally referred to as discretionary trusts, i.e., family trusts, the trustees of which have discretionary powers as to the distribution of trust income or property to beneficiaries, in considering the question of 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 powers of the trustees 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 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 sub-section 160ZZS(1), find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets 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. Shareholding in Company X in its capacity as trustee 21. Company X acted as the trustee of Unit trust X from XX until XX. 22. At incorporation the shareholders of Company X were Trust A and Trust B, each holding one ordinary share. 23. On the XX, Company X issued XX ordinary shares to Trust A and X ordinary shares to Trust B. 24. In XX, Trust A acquired the remaining X ordinary shares held by Trust B to become the sole shareholder of Company X. 25. Throughout this period the only asset Company X held beneficially was a nominal amount of cash representing its paid up share capital. Unit holdings in Unit Trust X 26. Unit Trust X UT was established XX issuing XX ordinary units (the majority of ordinary units) to Company B in its capacity as the trustee for Trust A and XX ordinary units to Company D in its capacity as trustee for Trust B. • The ordinary units carried rights in respect to income, capital and voting. 27. Prior to 20 September 1985, Trust A then acquired XX ordinary units in Unit Trust X from Trust B increasing its majority ordinary unit holding to XX. 28. Immediately prior to 20September 1985 Trust A held XX ordinary units and Trust B held XX. 29. At all relevant times Trust A controlled the distribution of income of Unit Trust X through its 50 percent or greater shareholding in Company X as trustee for Unit Trust X or through its majority ordinary unit holding in Unit Trust X. 30. At all times on and after 20 September 1985 the majority underlying interests in the units in Unit Trust X were had by the ultimate owners who had majority underlying interests in the units in Unit Trust X immediately before that day (re: subsection 149-30(2) of the ITAA 997). Subdivision 124-N roll-over 31. On or about the XX, Unit Trust X disposed of all its CGT assets to Company X and Company X issued XX ordinary shares to Trust A under subdivision 124-N of the ITAA 1997 with Unit Trust X vesting on XX. 32. Under the provisions of 124-N the following steps occurred: • Unit Trust X disposed of all its CGT assets to a company limited by shares, satisfying subsection 124-855(1)(a) • CGT event E4 was capable of applying to all the unit and interest in Unit Trust X, satisfying subsection 124855(1)(b) • Unit Trust X was the sole transferor, and therefore subsection 124-855(2) did not apply • The trust restructuring period started and ended on the X for the purposes of subsection 124-860(1) and (2) • Company X was not an exempt entity • Company X was the trustee of Unit Trust X as such, pursuant to subsection 124-860(5), subsection 124-860(4) did not apply • Just after the end of the trust restructuring period, Trust A owned shares in Company X in the same proportion as Company X owned interest in Unit Trust X and the market value of the XX ordinary shares in Company X was substantially the same as the market value of the units in Unit Trust X, satisfying subsection 124-860(6). • The single share in Company X owned by Trust A just before the trust restructuring period may be ignored under subsection 124-860(7) • Unit Trust X and Company X both chose to obtain the roll-over, satisfying subsection 124-865. 33. Subsection 124-875(3) provides that if the transferor (Unit Trust X) acquired any of the CGT assets disposed of to the transferee (Company X) under the trust restructure before 20 September 1985, the transferee is taken to have acquired it before that day, therefore Company X is taken to have acquired any CGT assets that Unit Trust X acquired before 20 September 1985 before that day and Trust A is taken to have acquired XX ordinary shares in Company X before the 20 September 1985. Cloning of Trust A 34. As at XX, XX of XXX, Company B as trustee of Trust A held XX ordinary shares in Company X of which XX were acquired prior to 20 September 1985. 35. On or about the XX,XX of XXXX, Company B commenced to hold the XX ordinary shares in Company X for a number of discretionary trusts 36. The beneficiaries and terms of each of the trusts were identical to the beneficiaries and terms of Trust A for the purposes of Taxation Ruling 2006/4 (withdrawn effective 21 July 2010). 37. CGT event E2 [7] did not happen upon Company B commencing to hold the ordinary shares in Company A as the exception in subsection 104-60(5)(b) applied at the time (prior to 1 November 2008) which stated: 104-60(5) CGT event E2 does not happen if: (b) you transferred the asset from another trust and the beneficiaries and terms of both trusts are the same. 38. CGT event A1 [8] also did not happen upon Company B commencing to hold the ordinary shares in Company X as the exception in subsection 104-10(2)(b) applied at the time (prior to 24 March 2010) which stated: You dispose of a *CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur: (b) merely because of a change of trustee. 39. Company B as trustee for the discretionary trusts is treated as having always owned the ordinary shares in Company X. 40. The ordinary shares in Company X therefore have the same acquisition date and elements of the cost base or reduced cost based in the hands of Company B as trustee for the discretionary trusts as they did in the hands of Company B as trustee for Trust A. 41. On or around the XX,XX of XXXX, the trustee for several discretionary trusts changed from Company B to Company G. 42. A further change of trustee occurred on or around the XX,XX of XXXX for several of the discretionary trusts and as noted in subsection 104-10(2) a CGT event A1 does not happen merely because of a change in the trustee. Share split 43. On or about the XX,XX of XXXX the ordinary shares in Company X were split into a larger number of ordinary shares in Company X, the share split was not a CGT event [9] and therefore the shares retained the same acquisition date and elements of cost base or reduced cost base. Relevant Shares 44. Immediately before 20 September 1985, Trust A held XX ordinary units in Unit Trust X. As a result of the Subdivision 124-N roll-over, these converted into XX ordinary shares in Company X out of a total of XX ordinary shares in Company X. 45. The XX ordinary shares in Company X were then subject of the trust cloning and share splitting. 46. The proportion of ordinary shares in Company X that were acquired or deemed to have been acquired by the Taxpayers before 20 September 1985 is therefore XX of the total XX ordinary shares. [1] Section 104-230 of the ITAA [2] Section 104-230 of the ITAA [3] As defined in Subsection 149-15(3) of the ITAA 1997 [4] Subsection 149-30(1) of the ITAA 1997 [5] Subsection 149-30(1A) of the ITAA 1997 [6] Subsection 149-30(2) of the ITAA of 1997 [7] Section 104-60 of the ITAA 1997 [8] Section 104-10 of the ITAA 1997 [9] Section 112-25 of the ITAA 1997