Private ruling: Capital gains tax implications
Published: July 2012
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will any capital gain you make on the disposal of the shares in the company be disregarded under subsection 104-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Will any distribution of the capital gain made on disposal of the company shares that is paid to the resident individual beneficiaries of the trust, be included in their assessable income? | A2: Invalid - beneficiaries are not listed in the application - general information provided

Relevant facts and circumstances: The discretionary trust was established in the mid 1970's financial year and is a resident of Australia for tax purposes. The beneficiaries of the trust are members of one family. The beneficiaries of the trust as at 20 September 1985 were the offspring. The remaining beneficiaries, were added as beneficiaries after this date. The beneficiaries are residents of Australia for tax purposes. The trust holds a 50% equity interest in the form of shares in a company. The shares were acquired prior to 20 September 1985. The shares are held on capital account. The trust intends to dispose of the shares in the company to a third party. The proceeds from the disposal of shares are intended to be distributed to the beneficiaries of the trust. You state that the market value of company's post-CGT property is less than 75% of its net value. You state that the market value of the company's post-CGT property, owned through interposed companies or trusts, is less than 75% of its net value.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 104-10(5) | Income Tax Assessment Act 1997 Section 104-230 | Income Tax Assessment Act 1997 Section 149-30 | Income Tax Assessment Act 1997 Section 149-15(1) | Income Tax Assessment Act 1936 Section 97 | Income Tax Assessment Act 1936 Subsection 99B(1) | Income Tax Assessment Act 1936 Subsection 99B(2) | Income Tax Assessment Act 1936 Division 6E of Part III | Income Tax Assessment Act 1997 Section 115-215 | Income Tax Assessment Act 1936 Section 102UY

Reasons for decision: Summary: The disposal of the shares in the company will not result in CGT event K6 occurring as the event does not satisfy the required conditions. Instead CGT event A1 will occur in relation to the disposal. As there has been a change of more than 50% in the majority underlying interest in the trust's assets, since 20 September 1985, the shares will be deemed to be post-CGT assets. Accordingly, any capital gain made on disposal of the shares will be assessed under the capital gains tax provisions. | Detailed Reasoning - Disposal of pre-CGT shares: Section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event A1 occurs when your ownership in a CGT asset (eg. shares in a company) is transferred to another entity. The time of the event is when you enter into a contract for the disposal, or, if there is no contract, the time of disposal is taken to be the time when the change in ownership occurs. Subsection 104-10(5) of the ITAA 1997 provides that a capital gain or capital loss will be disregarded if the asset was acquired before 20 September 1985. Section 104-230 of the ITAA 1997 deals with the disposal of pre-CGT shares and CGT event K6. CGT event K6 will occur if: · a taxpayer owns shares in a company acquired before 20 September 1985 · CGT event A1 occurs happens in relation to the shares. · there is no roll-over in relation to the A1 event, and either: · The market value of the property of the company (that is not trading stock) that was acquired on or after 20 September 1985; or · The market value of the property of the company owned through interposed entities (that is not trading stock) that was acquired on or after 20 September 1985, · is at least 75% of the net value of the company just before the disposal of the shares. If you meet conditions a), b) and c) and, either or both tests described at i) and ii) above, then CGT event K6 will occur and override CGT event A1. In your case, you meet conditions a), b) and c), however you state that the market value of the post-CGT property in the company (and property owned by the company through interposed entities) is less than 75% of its net value. Accordingly, CGT event K6 will not occur and therefore CGT event A1 is the most relevant CGT event in relation to the disposal of the shares. | Detailed Reasoning - Majority underlying interest: Under section 149-30 of the ITAA 1997, an asset stops being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners who held majority underlying interests in the asset immediately before 20 September 1985. Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of: · the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and · the beneficial interests that ultimate owners have (whether directly or indirectly) in any income that may be derived from the asset. The expression 'beneficial interests' as used in the definition of majority underlying interests is not defined. In general law, a shareholder does not have any legal or equitable interest in the assets of a company. Taxation Ruling IT 2340 reflects an approach of 'looking through' interposed entities to determine which natural persons hold the beneficial interests. Where shares in a company are held by the trustee of a discretionary trust, the shares are not beneficially owned by any persons. This creates difficulties when assessing whether the majority underlying beneficial interest in an asset is maintained. In this regard, paragraph 6 of IT 2340 requires the taxpayer to show that the trustee has administered the trust for the benefit of members of a particular family at all times during the relevant years of income. Furthermore, the trustee must not have exercised discretionary powers to appoint beneficiaries or amend the trust deed that would result in a practical change of 50% or more of the underlying interests in the trust assets. In your case, the trust commenced in the mid 1970's financial year and continues, to this day, to be administered for the benefit of the one family. As at 20 September 1985, the offspring were the only beneficiaries of the trust, with added beneficiaries after this time. There has been no appointment of any beneficiaries outside of the family. Following the addition of the other beneficiaries of the trust, it is now possible that the trustee could distribute 100% of any income and capital of the trust to these new beneficiaries without any distribution to the original beneficiaries. Therefore, with the change in beneficiaries, the Commissioner cannot be satisfied, or find it reasonable to assume, that more than 50% of the beneficial interests in the income and/or capital of the trust, and therefore majority underlying interests, have been held at all times by the same ultimate owners who held such interests immediately before 20 September 1985. Accordingly, the asset (the shares), stop being a pre-CGT asset at the earliest time when the majority underlying interests in the asset were not held by the ultimate owners. The shares will be deemed to have been acquired on the date when the new beneficiaries were added to the trust and will therefore be post-CGT assets. The cost base of the shares for determining any capital gain or loss on sale of the shares will be the market value of the shares at the date the asset is taken to have been acquired. | Detailed Reasoning - Taxation consequences for beneficiaries: We are unable to provide a ruling for the individual beneficiaries of the trust. This is because the individual owners are not identified rulees in the ruling application and will need to apply for a separate ruling and provide their individual consent to that ruling. However, the following information has been provided as general guidance only. Section 97 of the ITAA 1936 provides that the assessable income of a beneficiary shall include; · the share of the net income of the trust estate, attributable to a period when the beneficiary was a resident; and · the share of the net income of the trust estate, attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia. Subsection 99B(1) of the ITAA 1936 explains that an amount, being property of a trust estate paid to a beneficiary, shall be included in the assessable income of the beneficiary, subject to subsection 99B(2). Subsection 99B(2) of the ITAA 1936 provides that an amount paid to the beneficiary of the trust estate should be reduced by the amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income. Division 6E of Part III of the ITAA 1936 enables trustees to appoint or stream capital gains made by a trust to a beneficiary by making them specifically entitled to the gain, provided this is allowed by the trust deed. Section 115-215 of the ITAA 1997 provides that appropriate amounts of the trust estate's net income attributable to the trust estate's capital gains are treated as a beneficiary's capital gains when assessing the beneficiary, so: · the beneficiary can apply capital losses against gains; and · the beneficiary can apply the appropriate discount percentage (if any) to gains. Section 102UY of the ITAA 1936 adjusts the amount otherwise included in a beneficiary's assessable income, under section 97 of the ITAA 1936, by effectively ignoring any capital gains that are brought to tax under section 115-215 of the ITAA 1997. Its purpose is to avoid double taxation of capital gains by adjusting the amount included in a beneficiary's assessable income under section 97 of the ITAA 1936. In your case, you will make a capital gain on disposal of shares. The shares have been deemed to be post-CGT shares due to the change in the majority underlying interest of the trust assets (as discussed above) and therefore any gain made on disposal of the shares will not be disregarded under subsection 104-10(5) of the ITAA 1997. Accordingly, depending on the particular beneficiary's entitlement to income and/or capital of the trust, any capital gain made by the trust on the disposal of shares will be included as income, under section 97 of the ITAA 1936, or, as a capital gain under section 115-215 of the ITAA 1997, in the hands of the beneficiary of the trust.

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.