Private ruling: CGT - Pre-CGT asset - Change in majority underlying assets
Date of advice: 25 October 2017
Published: March 2018
Ruling period: 2015-16 income year
Date scheme commenced: 1 July 198X

Ruling: Q1: Did the Company hold the first property as a pre-CGT asset at the time it was sold in the 2015-16 income year? | A1: Yes.

Relevant facts and circumstances: The Company was incorporated before 1985. The company has always had about 100 ordinary shares on issue. At the time of incorporation, the sole shareholders of the Company were two trustees, who each held legal title to half of the shares on issue in the Company. The trustees are related to the six beneficiaries. At all times, the trustees each held their shares in the Company on trust for each of the three couples. There are six essentially identical documents dated before 1985 acknowledging that the trustees held the Shares on the following trusts: ● Trustee A – on behalf of one couple ● Trustee A – on behalf of one other couple ● Trustee A – on behalf of the other couple ● Trustee B – on behalf of one couple ● Trustee B – on behalf of one other couple ● Trustee B – on behalf of the other couple The relevant part of each acknowledgement reads as follows: With reference to the xxxx ordinary shares in yyyyyyy Pty Ltd (herein called “the Share”) which at your request I hold in my name I CONFIRM that the purchase money for the said share is to be provided by you out of your own monies AND I ALSO CONFIRM AND DECLARE that: 1. I hold the said share and all dividends to accrue upon or in respect of it upon trust for you and I agree to transfer, pay and deal with the said share and such dividends in such manner as you shall from time to time in writing direct. 2. I will at you request attend all meetings of shareholders or otherwise which I shall be entitled to attend by virtue of being the holder of the said share and will vote at every meeting in such manner as you shall have previously directed in writing and in default of and subject to any such direction, at my discretion and further, I will, if so required by you execute all proxies, powers of attorney, or other documents which shall be necessary or proper to enable you to vote at any such meetings in my place. 3. You may at your absolute discretion at any time by registered deed or deeds do either or both of the following things, that is to say: a. Remove me as trustee of the said share with or without assigning any reason for so doing, b. Appoint a new or additional trustee or trustees of the said share. 4. I hereby nominate, constitute and appoint you to be my lawful attorney for me and in my name and as and for me to act to sell and/or transfer the said share to any person, firm or company and to procure the terms of this instrument or any one or more of them to be observed and properly carried into effect and for those purposes to sign, execute and do all such documents, deeds and things as may be reasonably requisite or necessary and I hereby undertake to ratify and confirm all that you may do or purport to do in exercise of the foregoing powers or any of them. The arrangement was structured with the trustees holding legal title to all of the share capital in the Company because at the time the Company was incorporated: ● Both trustees were residents of Australia for tax purposes, and ● The couples were foreign residents. The trustees did not contribute financially to the Company – neither trustee used their own funds to subscribe for shares in the Company, nor did they contribute to the Company’s acquisition of the Investment Properties. About 2010, the trustees transferred legal title to all of the shares in the Company to each couple jointly. The share transfers were stamped. About 2015, one of the beneficiaries passed away. As this beneficiary and their spouse held the Shares as joint tenants, their interest in the Shares automatically passed to their spouse upon this death. Until recently, the Company owned two Investment Properties: ● A property which was acquired by the Company before 1985 and is therefore a pre-CGT asset, and ● A property which was acquired after 1985 and is a post-CGT asset. The Company sold the first property during the 2015-16 income year. The Company also intends to sell the second property. Following the sale of both Investment Properties, the Company will be wound up. It is expected that the Company will be wound up within 18 months of any payment made by the liquidator of the Company (the distribution). The Company’s financial statements for the 2015-16 financial year show the following amounts standing to the Equity Accounts: ● Issued & paid up capital xx.xx ● Capital profits reserve xxx,xxx.xx ● Retained profits xxx,xxx.xx ● Total Equity xxx,xxx.xx Assumption For the purpose of this ruling, the Company will be wound up within 18 months of any payment made by the liquidator of the Company.

Relevant legislative provisions: Income Tax Assessment Act 1997 Part 3-1 and | Income Tax Assessment Act 1997 Part 3-3.

Reasons for decision: Summary: The Company held the first property as a pre-CGT asset at the time it was sold in the 2015-16 income year. | Detailed Reasoning - Detailed reasoning: The Company acquired the first property before 20 September 1985 making it initially a pre-CGT asset for the Company. The first property continues to be a pre-CGT asset for the Company unless there is a change by more than 50% in the majority underlying interests of the Company and therefore the first property. As at 20 September 1985, all of the shares in the Company were held by the trustees in six bare trusts with the beneficiaries being each of the three couples jointly. These beneficiaries were the ultimate owners of the shares in the Company and therefore the first property for the purpose of this test. About 2010, the trustees transferred legal title to all of the shares in the Company to these beneficiaries. This act does not change the ultimate owners of the shares in the Company or the first property. About 2015, one beneficiary passed away. As this beneficiary and their spouse held the Shares as joint tenants, their interest in the Shares automatically passed to their spouse upon their death. There is a special rule that prevents a change of ownership due to the death of a person being counted toward any change in majority underlying interests in a CGT asset. Therefore, there was no change in the majority underlying interests of the first property while it was owned by the Company meaning it was still a pre-CGT asset when sold by the Company in the 2015-16 income year.

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