Private ruling: CGT - majority underlying interests
Published: August 2015
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Will the Commissioner exercise his discretion under subsection 149-30(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to assume that, at all times on and after 20 September 1985 until the disposal time majority underlying interests in the Property were held by ultimate owners who had majority underlying interests in the Property immediately before that day, such that the Property remained a pre-CGT asset at the time it was sold? | A1: Yes

Relevant facts and circumstances: The Company acquired the Property prior to 1985. The Property was subsequently sold in 2014. No buildings or structures were constructed on the Property after 20 September 1985 that would be treated as a separate asset. Capital improvements made to the property are not treated as separate capital gains tax as their value did not both exceed the relevant improvement threshold and did not represent more than 5% of the capital proceeds from the sale of the property. Shareholdings in the Company The shares in the Company have at all times since establishment been owned by or for the benefit of members of the X family. The Company has had a number of different classes of shares with varying rights. Changes to the Company's share register since incorporation Please find below some detailed information regarding changes to the Company's share register, which represent changes in the Company's ownership since incorporation. No other changes have occurred apart from those described below. In summary, there have been three key changes in the Company's share register since incorporation, as follows: • Series of redemptions, cancellations and transfers; • Share transfers as a result of a death; and • Capital restructuring as a result of a death.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 149

Reasons for decision: Summary: Subsections 149-30(1) and 149-30(1A) of the Income Tax Assessment Act 1997 (ITAA 1997) provide that an asset stops being a pre-capital gains tax (CGT) asset at the earliest time when majority underlying interests in the asset were not held by the ultimate owners who had majority underlying interests in the asset immediately before 20 September 1985. This applies to the asset as if the entity had acquired the asset at the earliest date when majority underlying interest changed. Majority underlying interests is defined in subsection 149-15(1) of the ITAA 1997 as more than 50% of: (a) the beneficial interests that ultimate owners have (whether directly or indirectly) in the asset and (b) the beneficial interests that ultimate owners have (whether directly or indirectly) in any income that may be derived from the asset. Accordingly, ultimate owners who held majority underlying interests in an asset just before 20 September 1985 must retain such interests after that date, otherwise Division 149 of the ITAA 1997 will be triggered to convert the asset into a post-CGT asset. In these cases, the asset is deemed to have a new date of acquisition (the date the majority underlying interest changed). Section 149-35 of the ITAA 1997 provides that the deemed first element acquisition costs for the purposes of determining the cost base (and reduced cost base), will be the market value of the asset at the time of change. Subsection 149-30(2) of the ITAA 1997 provides that 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 149-30(1) and 149-30(1A) of the ITAA 1997 apply as if that were in fact the case. That is, subsection 149-30(2) of the ITAA 1997 provides scope for the Commissioner to simply be satisfied that there was continuity of majority underlying beneficial interests. Subsections 149-30(3) and 149-30(4) of the ITAA 1997 provide that, if an ultimate owner (new owner) has acquired an interest in an asset because it was transferred to the new owner by way of a marriage breakdown rollover or because of the death of a person (former owner), the 'new owner' is treated as having held the underlying interest of the 'former owner' for the period the 'former owner' held them. In this case, there were changes to the Company's shareholdings that resulted from share redemptions and cancellations, the death of family members and the vesting of family trusts. However, the rights to income and capital from the Company's assets (including the Property) have remained with the members of the same family group over the relevant period (IT 2340). Having considered the relevant facts and circumstances, the Commissioner is satisfied, or thinks it reasonable to assume, that at all times on and after 20 September 1985, the majority underlying interests in the asset were had by ultimate owners who had majority underlying interests in the asset immediately before that day. Accordingly, Division 149 of the ITAA 1997 will not be triggered by any of the changes to the shareholdings and the Property will retain its pre-CGT status.