Private ruling: CGT - discretionary shares
Date of advice: 16 May 2024
Published: 24 June 2024
Date scheme commenced: 1 July 20YY

Ruling: Q1: Will former subsection 160ZZS(1) of the Income Tax Assessment Act 1936 (ITAA 1936) or Division 149 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to deem the acquisition date of the shares in Company A that Company B acquired before 20 September 1985 to be a date on or after 20 September 1985? | A1: Yes. | Q2: If the answer to question 1 is yes, for the purposes of subsection 149-30(2) of the ITAA 1997, having regard to the facts and circumstances, is the Commissioner satisfied or think it reasonable to assume that at all times on or after 20 September 1985 the majority underlying interests in the shares in Company A held by Company B were held by ultimate owners who held majority underlying interests in these shares immediately before 20 September 1985? | A2: No. This private ruling applies for the following period: Income year ended 30 June 20YY The scheme commenced on: 1 July 20YY

Relevant facts and circumstances: Company A is a proprietary company that was incorporated before 20 September 1985. Company B acquired shares in Company A before 20 September 1985, which it has continued to own up until it recently when it sold the shares to an unrelated third party. Company B is a proprietary company that was incorporated before 20 September 1985. Individual A, Individual B and Company C acquired ordinary shares in Company B before 20 September 1985. Individual A and Company C both still currently own the shares in Company B they acquired before 20 September 1985. Individual A and their spouse currently own all the shares in Company C. Individual A acquired their shares in Company C before 20 September 1985 and their spouse acquired the shares in Company C after 20 September 1985. The Articles of Company B were amended after 20 September 1985 to allow for the issue of D Class shares. The rights attached to the D Class shares allow dividends to be paid on the D Class shares to the exclusion of all other share classes at the discretion of the directors. Company B issued an equal number of D Class shares to Company D and Company E shortly after the Articles of Company B were amended. The sole shareholder of Company D is Trust A. Trust A is a discretionary trust that was established after 20 September 1985 and its beneficiaries include Individual A and their family members. Individual A's family members did not have any interest in Company B before 20 September 1985. Individual A did not receive any distributions from Trust A in the income year the D Class shares were issued. The ultimate owner of the shares in Company E is Individual B. Company E has since transferred the D Class shares it acquired in Company B to Company D. The shares that Individual B acquired in Company B before 20 September 1985 were bought back by Company B after the D Class shares were issued. All entities have been Australian income tax residents at all relevant times.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 82KZC(1) | Income Tax Assessment Act 1936 subsection 160ZZS(1) | Income Tax Assessment Act 1936 subsection 160ZZS(1A) | Income Tax Assessment Act 1936 subsection 160ZZS(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(3) | Income Tax Assessment Act 1997 subsection 149-30(1) | Income Tax Assessment Act 1997 subsection 149-30(2) | Income Tax (Transitional Provisions) Act 1997 section 149-5

Reasons for decision: Summary: Former subsection 160ZZS(1) of the ITAA 1936 will apply to deem the acquisition date of the shares in Company A that Company B acquired before 20 September 1985 to be in 199X. | Detailed Reasoning - Detailed reasoning: Section 149-10 of the ITAA 1997 provides that 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. Note: There are transitional rules for assets that stopped being pre-CGT assets under the Income Tax Assessment Act 1936 : see section 149-5 of the Income Tax (Transitional Provisions) Act 1997 . Former subsection 160ZZS(1) of the ITAA 1936, which applied to pre-CGT assets held by non-public entities between 20 September 1985 and the end of the 1998 income year, provides the following: 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. Former subsection 160ZZS(1A) of the ITAA 1936 provided that where former subsection 160ZZS(1) applies to deem an asset to have been acquired after 19 September 1985, the asset will be taken to have been acquired for the purposes of Part IIIA of the ITAA 1936 on the date on which the majority underlying interests in the asset ceases to be held by the taxpayer who held that interest immediately before 20 September 1985. Further, the taxpayer is taken to have acquired the asset for consideration equal to the market value of the asset at that time. Former subsection 160ZZS(3) of the ITAA 1936 provided that up until 19 January 1997, 'majority underlying interests' and 'underlying interest' when applying subsection 160ZZS(1) have the same meaning as in Subdivision 3G of Part III. 'Majority underlying interests' in relation to property was defined in former subsection 82KZC(1) in Subdivision 3G of Part III 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. 'Underlying interest' in relation to property was defined in former section 82KZC in Subdivision 3G of Part III of the ITAA 1936 to mean a beneficial interest held by a natural person (whether directly or through one or more interposed companies, partnerships or trusts) in the property or in any income that may be derived from the property. From the 1999 income year, subsection 149-30(1) of the ITAA 1997 states that a CGT asset stops being a pre-CGT asset at the earliest time when the 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. 'Majority underlying interests in a CGT asset' is defined in subsection 149-15(1) of the ITAA 1997 to mean more than 50% of the beneficial interests that ultimate owners have, whether directly or indirectly, in the asset and in any ordinary income that may be derived from the asset. Therefore, it is not a relevant factor whether or not a third party may have started to benefit from the income derived from the Company A shares. The provisions only take into account the interests an entity had in the CGT asset and any income derived from the asset since before 20 September 1985. Where a CGT asset is disposed of in the 1999 and future income years, section 149-5 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA) provides that where former section 160ZZS of the ITAA 1936 applies to deem the acquisition date of a CGT asset to be a date on or after 20 September 1985, the CGT asset is also taken to have been acquired on this date when applying Part 3-1 and 3-3 of the ITAA 1997. Section 149-5 of the ITTPA also provides that in this situation the first element of the cost base and reduced cost of the CGT asset for the purposes of applying Parts 3-1 and 3-3 of the ITAA 1997 will be the amount the entity is taken to have acquired the asset for under former section 160ZZS of the ITAA 1936. Division 149 of the ITAA 1997 is consistent with former Division 20 of the ITAA 1936, which contains former subsection 160ZZS(1). | Detailed Reasoning - Application to your circumstances: In this situation, the relevant CGT assets are the ordinary shares in Company A that Company B has owned since before 20 September 1985 until they were recently sold to an unrelated third party. As Company B is not a natural person, it must be looked through to determine if up until the end of the 19YY income year, the Commissioner is satisfied or considers it is reasonable to assume that natural persons held more than one-half of the beneficial interests in the Company A shares held by Company B, and any income derived from the shares, since before 20 September 1985 in accordance with former section 160ZZS of the ITAA 1936. Similarly, from the 19YY income year, as Company B is not an ultimate owner of the shares it owns in Company A as defined by subsection 149-15(3) of the ITAA 1997, Company B must be looked through to determine if more than 50% of the beneficial interests in the shares and any income derived from the shares were had by the same ultimate owners who had such beneficial interests immediately before 20 September 1985. As Individual A and Individual B are the only natural persons that had a beneficial interest in the Company A shares and therefore any income derived from the shares held by Company B immediately before 20 September 1985, it must be determined if together they held the majority underlying interests in the Company A shares held by Company B since before 20 September 1985 in accordance with both former section 160ZZS of the ITAA 1936 and Division 149 of the ITAA 1997. Company B issued the same amount of D Class shares to Company D and Company E in 199X income year. The rights attached to the D Class shares allow dividends to be paid on the D Class shares to the exclusion of all other share classes at the discretion of the directors. From when the D Class shares were issued,, Trust A has held 100% of the shares in Company D. Trust A is a discretionary trust and the beneficiaries of the trust include Individual A, their spouse and family members. Individual A's spouse and family members did not have a beneficial interest in any Company B shares, or any income derived from the shares before 20 September 1985. Therefore, when Company B issued the D Class shares, the rights attached to those shares provided the directors of Company B with the discretion to pay 50% of any dividends to Company D. The directors of Company D then had the ability to pay 100% of any dividends to Trust A, and the trustee of Trust A had the ability to distribute 100% of the income of the trust to any beneficiaries of the trust other than Individual A. This demonstrates that when the D Class shares were issued, there was the possibility that Individual A may receive between 0% and 50% of the income derived from the Company A shares held by Company B. Whilst Individual B was eligible to receive exactly 50% of the income derived from the D Class shares when they ultimately held a 100% interest in the shares of Company E, this on its own it not sufficient as section 82KZC of the ITAA 1936 defines a majority underlying interest in an asset as more than one-half of the asset and any income derived from the asset. Due to this, it is not necessary to also consider the interests that Individual A and Individual B had in the Company A shares held by Company B since before 20 September 1985 as the majority underlying interest as defined in former subsection 82KZC(1) in Subdivision 3G of Part III of the ITAA 1936 requires interests to be held in both the asset and the income derived from the asset. Therefore, the Commissioner cannot be satisfied or consider it reasonable to assume that at all times after 20 September 1985, the majority underlying interests in the Company A shares held by Company B were held by natural persons who, immediately before 20 September 1985, held majority underlying interests in the shares in accordance with former subsection 160ZZS(1) of the ITAA 1936. In accordance with former 160ZZS(1A) of the ITAA 1936, Company B will be deemed to have acquired the Company A shares in 199X when the D Class shares were issued, as the majority underlying interests ceased to be held by Individual A and Individual B on that date. For the purposes of applying Parts 3-1 and 3-3 of the ITAA 1997, Company B will be taken to have acquired the shares in 199X year for consideration equal to the market value of the shares at that time in accordance with section 149-5 of the ITTPA. | Detailed Reasoning - ATO Interpretative Decision ATO ID 2011/107: This situation is analogous with the fact scenario in ATO Interpretative Decision ATO ID 2011/107 Income Tax Capital Gains Tax: Division 149 majority underlying interests - new shareholder. ATO ID 2011/107 considers the application of Division 149 of the ITAA 1997 in the context of a company that had shares with discretionary rights to dividends and concluded that the majority underlying interests were not maintained when a new shareholder was introduced. It is considered that the guidance in ATO ID 2011/107 is applicable in this situation as former section 160ZZS of the ITAA 1936 and Division 149 of the ITAA 1997 have similar effect. In the fact scenario in ATO ID 2011/107, a company owned a pre-CGT asset. All the shares held in the company had discretionary rights to dividends. An additional share, also with discretionary rights to dividends, was issued after 20 September 1985 to a new shareholder, being a discretionary trust. The beneficiaries of the trust included an individual (Individual X) that also had an indirect beneficial interest in the shares and income derived from the shares of the company before 20 September 1985, as well as that individual's family members. As all the shares of the company had a discretionary right to dividends, the company could distribute dividends to one shareholder to the exclusion of some or all of the other shareholders. Similarly, if a dividend was paid to the new trust shareholder, it could, in turn, be distributed to any beneficiaries of the trust who did not have a beneficial interest in the asset and any income derived from the asset before 20 September 1985. Therefore, the Commissioner could not be satisfied, or find it reasonable to assume, that there had been a continuity of majority underlying interests in the asset for the purpose of subsection 149-30(2) of the ITAA 1997. The facts in ATO ID 2011/107 are consistent with those in the current circumstances where new shares in a company with discretionary rights to dividends were ultimately issued to a discretionary trust, and one of the beneficiaries of the trust was also a shareholder of the company before 20 September 1985, as was Individual A via their interest in the discretionary trust. Accordingly, the possibility exists that Individual A and Individual B who between them collectively had majority underlying interests in the asset immediately before 20 September 1985 may not receive more than 50% of the ordinary income that may be derived from the Company A shares held by Company B from when the D Class shares were issued by Company B. It is further noted that this possibility actually did occur in the 199X income year. During that income year,, Company B paid 100% of the dividends to the shareholders of the D Class shares, Company D paid 100% of its dividends to Trust A and the trustee of Trust A exercised the discretion to distribute 100% of the income of the trust to Individual A's spouse as a beneficiary of the trust. Consequently, Individual A did not receive any income from the Company A shares owned by Company B in the 199X income year. Even though Individual B received 100% of the dividends from the D Class shares held by Company E in that year, this on its own is not more than 50% of the income derived from the Company A shares held by Company B. 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 IT 2340 discusses the Commissioner's approach to determining whether majority underlying interests in the pre-CGT asset have changed in the context of the former section 160ZZS of the ITAA 1936. IT 2340 states that 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 a discretion. In such a case, the Commissioner would find it reasonable to assume that for all practical purposes the majority underlying interests in the trust assets have not changed. However, IT 2340 makes it clear that the concessionary approach it provides only applies to pre-CGT assets acquired by discretionary trusts settled prior to 20 September 1985. The guidance in IT 2340 does not apply to assess the beneficial interest of beneficiaries in the assets of, or ordinary income of, discretionary trusts which have been settled after 20 September 1985 for the purpose assessing majority underlying interests. Therefore, as Trust A was established after 20 September 1985, the approach outlined in IT 2340 is not applicable in this situation. | Summary: The discretion in subsection 104-30(2) of the ITAA 1997 is not applicable in this situation. | Detailed Reasoning - Detailed reasoning: Subsection 149-30(2) of the ITAA 1997 provides that where the Commissioner is satisfied, or thinks it reasonable to assume, that at all times after 20 September 1985 and before a particular time, majority underlying interests in the asset were held by ultimate owners who had majority underlying interests immediately before that date, then subsection 149-30(1) applies as if that were in fact the case. The discretion in subsection 149-30(2) of the ITAA 1997 may be exercised where a CGT asset stops being a pre-CGT asset in accordance with subsection 104-30(1). However, as determined in question 1, subsection 149-30(1) will not apply in this situation. As the majority underlying interests in the Company A shares ceased to be held by Individual A in 199X when the D Class shares were issued by Company B, former subsection 160ZZS(1) of the ITAA 1936 is the provision that applied at that time. Furthermore, subsection 149-30(2) of the ITAA 1997 contains similar wording to former subsection 160ZZS(1) of the ITAA 1936 as both provisions are satisfied if 'the Commissioner is satisfied, or considers it reasonable to assume...' the majority underlying interest in an asset were held by the same owners since immediately before 20 September 1985. As determined in question 1, the Commissioner is not satisfied and does not consider it reasonable to assume that at all times after 20 September 1985 the majority underlying interests in the asset were held by the same ultimate owners who had majority underlying interests in the asset immediately before that date.

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