Private ruling: CGT - majority underlying interests
Date of advice: 21 February 2017
Published: July 2017
Ruling period: Year ending 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | 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 2016

Ruling: Q1: Has there been a change to the majority underlying interests held in the Company since immediately prior to 20 September 1985 as described in subsection 149-30(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: The Company was incorporated prior to 1985. Before 20 September 1985, the Company acquired real property and shares in a company (the Assets) that it continues to hold today. The Assets were acquired for the purpose of producing passive income. Immediately prior to 20 September 1985 the Company was controlled by X and Y, who had less than five children. Immediately prior to 20 September 1985 the Company was controlled by X and Y. Following X's death, X's shares passed to Y. Following Y's death, Y's shares were transferred to testamentary trusts (collectively referred to as the Testamentary Trusts); the beneficiaries of the respective Testamentary Trusts were X and Y's children and their families.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 149 | Income Tax Assessment Act 1997 Section 149-15 | Income Tax Assessment Act 1997 Section 149-30

Reasons for decision: Summary: Division 149 of the ITAA 1997 outlines the rules which govern when an asset acquired by a taxpayer before 20 September 1985 is treated as being acquired after that date for capital gains tax (CGT) purposes. Under subsection 149-30(1) of the ITAA 1997, a pre-CGT asset of a non-public entity stops being a pre-CGT asset at the earliest time when the majority underlying interest in the asset were not had by the ultimate owners who had the majority underlying interests in the asset immediately before 20 September 1985. Subsection 149-15(1) of the ITAA 1997 provides that majority underlying interests in a CGT asset consists of: ● more than 50% of the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset; and ● 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. Subsection 149-30(4) of the ITAA 1997 provides that if an ultimate owner (new owner) has acquired an interest in an asset which is transferred to them as a result of the death of a person (the former owner), the new owner is treated as having held the underlying interest of the former owner over the years. Essentially the new owner will stand in the shoes of the former owners. A beneficiary in a discretionary trust, such as the trust, could not be said to have a beneficial interest in the income or assets of the trust, in the light of cases such as Gartside v IRC [1968] AC 553 and Re Weir's Settlement MacPherson and anor v. IRC [1970] 1 All ER 297. However, paragraphs 5 to 7 of Taxation Ruling IT 2340 discuss what happens in respect of non-fixed family trusts and the application of the former section 160ZZS of the Income Tax Assessment Act 1936 (now Division 149 of the ITAA 1997): 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. On that basis, trust assets acquired by the trustee before 20 September 1985 would remain outside the scope of the capital gains and losses provisions of the Act.' The discretionary powers of the trustee of a discretionary (family) trust and those of the trustee of a discretionary testamentary trust are not materially different and it is reasonable to adopt the same approach to both when considering the question of majority underlying interests for purposes of Division 149 of the ITAA 1997 (ATO Interpretive Decision ATO ID 2003/778). | Detailed Reasoning - Application to your circumstances: In this case, following X's death, X's shares passed to Y. In accordance with subsection 149-30(4) of the ITAA 1997, Y would have been taken to have held those shares from X's date of acquisition. Similarly, following Y's death, subsection 149-30(4) of the ITAA 1997 and the principles from IT 2340 and ATO 2003/778 would apply. The Commissioner finds it reasonable, in accordance with subsection 149-30(2) of the ITAA 1997, to assume that majority underlying interests in the Company have been held at all times by the same ultimate owners who held such interests immediately before 20 September 1985. Accordingly there will be no change to the pre-CGT status of the assets held by the Company.